Now that semiconductor giant Intel (NASDAQ:INTC) has raised its guidance for this year, the next step management can take to enhance shareholder value would be to increase the dividend.
Intel hasn't given investors a dividend raise in nearly two years. Indeed, there was good reason for this. Intel is still reliant on the personal computer, and has struggled to get its chips into tablets and other mobile devices. In an increasingly mobile world, there were rampant fears that the personal computer would go the way of the buggy whip.
As a result, it's understandable that Intel needed to save as much cash as it could to invest in new technologies. Apparently, Intel is finally seeing enough progress on these measures to announce it will likely return to revenue growth this year. And, assuming margins expand as anticipated, profits will grow as well.
But Intel isn't the only company going through this. Hewlett-Packard Company (NYSE:HPQ) is in the middle of its own turnaround. HP is busily investing in new markets and product categories, but that hasn't stopped it from increasing its dividend several times over the past few years.
With the dark storm clouds no longer hanging over Intel's head, it's time to reward loyal shareholders with a dividend increase.
All eyes on the payout
Intel hasn't raised its dividend in quite some time, but it didn't have to. With so many concerns about the state of its business and its declining profits, Intel's stock price was stuck in the doldrums. That kept Intel's dividend yield fairly high, since a stock price and dividend yield are inversely related. The stock was already a high-yielder, especially for its industry.
Plainly stated, there wasn't much urgency for Intel management to raise its dividend when it yielded nearly 4%. But now that Intel's share price has recovered and sits at $30 per share, a level not seen in a decade. In turn, its yield is back down to 3%.
Nevertheless, Intel's lack of a dividend raise is a curious decision. It's certainly true that the uncertainties in the rapidly evolving world of technology are cause for conservatism. But Intel is still highly profitable, with little debt on the balance sheet to worry about and a comfortable payout ratio. And, Intel holds $10 billion in cash and short-term securities, which in all likelihood isn't earning anything for shareholders.
Intel generated $1.89 in earnings per share last year. Its $0.90 per share dividend equates to just a 47% payout ratio, which is already a very modest level. And, now that Intel expects revenue growth and margin expansion this year, it stands to reason the payout ratio will drop going forward as earnings per share likely increase.
Equally confusing is that Intel's PC peer HP hasn't held back its dividend increases. HP has had its own fair share of PC-related headaches. It's seen first-hand the effects of a huge and mature company struggling to break the chains of old technology. To that end, HP's revenue is down 1% over the past six months, which makes it clear the company still has a ways to go before its turnaround is complete.
But that hasn't stopped HP from raising its dividend along the way. Since Intel announced its last dividend increase, HP has upped its own payout three times, including the most recent 10% bump.
Show shareholders the money, Intel
Intel once held the reputation of a dividend growth stalwart. Until 2012, the company had raised its payout every year for a decade. That all came to a halt, however, when the mobile revolution caught Intel completely off guard.
Since then, Intel has plowed most of its cash flow into new product categories. Fortunately, there are finally glimmers of hope that these investments will pay off. After a few years of stagnant results, Intel expects revenue growth and margin expansion this year.
Assuming it hits its projections, there's no reason why Intel can't raise its dividends. It maintains a conservative payout ratio and holds a rock-solid balance sheet stuffed with cash. Loyal shareholders have stuck with Intel through thick and thin. It's now time to reward them with a dividend increase.
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Bob Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.