Should Intel Raise Its Dividend?

While capital gains are an important part of total returns, dividends are also an integral -- if less exciting -- part of the long-term investment equation. A high-growth stock still in the early innings of a multi-year growth path isn't going to worry so much about returning cash to shareholders, but a larger blue-chip name like Intel (NASDAQ: INTC  ) that generates more cash than it knows what to do with will return part of it to shareholders via dividends and buybacks.

That said, after a couple of years of no dividend increases, Intel stockholders are wondering if it's now time -- particularly after the most recent guidance raise -- for a dividend increase.

Intel's target payout ratio: 40%
At the company's 2013 Investor Meeting, it was made quite clear that Intel's capital return policy calls for a dividend of approximately 40% of free cash flow. At today's $0.90/share, Intel is returning about $4.5 billion/year in the form of dividends alone, or approximately 51.3% of trailing-12-month free cash flow.

INTC Free Cash Flow (TTM) Chart

INTC Free Cash Flow (TTM) data by YCharts.

Now, for a capital-intensive company like Intel, the free cash flow picture can often be a bit lumpy depending on the timing of capital expenditures (this is in stark contrast to competitor Qualcomm (NASDAQ: QCOM  ) , which spends little on capex and sees the majority of its cash flow in the form of royalties). As far as the dividend goes, we can probably use GAAP earnings per share to get a sense of where the dividend is headed in the long run.

After Intel's revised guidance for the quarter, current sell-side consensus sits at $2.02/share on revenues of $54.54 billion. A 40% payout ratio based on that number works out to roughly $0.81/share. The dividend currently sits at $0.90/share, so Intel is still running a bit hot relative to its stated dividend payout target.

Keep in mind from whence the cash comes
Something investors also need to be aware of is that capital returns need to be done with U.S.-based cash. The costs to bring cash generated overseas (for tax purposes) can often be substantial, which is why this is not a particularly attractive option for many companies.

Note that according to Intel's most recent form 10-K , only 17% of its revenues are generated domestically, with the rest generated overseas. This suggests Intel is paying out all of the profits it generates domestically -- and then some!

Foolish bottom line
While investors would certainly love to see more of their money returned to them in the form of dividends, Intel's dividend program is already quite generous -- it's still yielding far more than nearest competitors Qualcomm, at 2.12%, and Taiwan Semiconductor, at 2.36%. Over the long run (think two to three years), Intel may be able to dramatically up its dividend as earnings grow, but in the near term, the dividend still looks pretty healthy and quite generous even without a raise.

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  • Report this Comment On June 20, 2014, at 10:04 AM, stretcho44 wrote:

    "only 17% of its revenues are generated domestically, with the rest generated overseas. This suggests Intel is paying out all of the profits it generates domestically -- and then some!"

    Very good numbers. Thanks.

    I also appreciate the moderate words and lack of hyperbole in the article.

    It might be interesting to estimate how much of the dividend the 17% revenues covers AND THEN to compute the real dollar cost to Intel in the extra taxes they pay on repatriated cash required to pay the dividend.

  • Report this Comment On June 20, 2014, at 11:13 AM, ffbj wrote:

    Caught by a headline again, as I thought you were going to say the opposite. So i agree. They won't and don't need to raise their dividend.

  • Report this Comment On June 21, 2014, at 2:19 PM, EquityBull wrote:

    Doesn't Intel do fairly large stock buybacks too? If so the share count would have been shrinking each year and since they payout a dividend on a per share basis this means the payout itself should have been shrinking as well in absolute dollar terms.

    For example if Intel had 1 billion shares today and paid $4/share that is $4 billion in dividends paid out. If they bought back half the shares there are just 500 million in the float that will get paid the $4/share dividend. Payout in dollar terms drops from $4 billion down to $2 billion.

    With the shrinking float and fewer dollars going to fewer shares each year perhaps they can, and should, raise the dividend.

  • Report this Comment On June 23, 2014, at 4:37 AM, stretcho44 wrote:

    The Intel Board of Directors established the share repurchase program in October 2005.

    The Intel BOD funded that program with a large chunk of cash repatriated from overseas when the tax holiday law was passed by Congress 2004.

    The tax holiday for U.S. multinational companies, allowed them to repatriate foreign profits to the United States at a 5.25% tax rate.

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Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


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