The 1 Thing Missing From Intel Corporation's Great Earnings Report

After spending several years stuck below $26 per share, shares of technology giant Intel Corporation (NASDAQ: INTC  ) are finally breaking out. For the past few years, Intel fell behind the curve and missed out on the global boom in mobile devices like smartphones and tablets. It produced lackluster growth for several quarters, due to its weak shipments in personal computers and lack of growth in other businesses.

Now, it seems Intel can do no wrong. Shares are up an astounding 31% just since the beginning of this year. Intel has made measurable progress in high-growth opportunities like data centers and the Internet of Things. And it's even benefiting from stabilizing PC shipments.

Intel's second-quarter earnings report, released on July 15, proved its momentum is accelerating. But one item is still curiously missing from Intel's reports over this time. In this area, it's falling behind other technology stocks like Microsoft Corporation (NASDAQ: MSFT  ) . This is an important aspect of the company that was likely the reason many investors bought Intel in the first place, and it's something Intel management should pay closer attention to.

Momentum building
Everything coming out of Intel in 2014 has been extremely positive. Earlier this year, Intel raised its guidance for both the second quarter and the full year. It actually managed to beat its upwardly revised expectations for the second quarter, thanks to record quarterly microprocessor shipments.

In all, revenue grew 8% year over year. Earnings per share soared 41% versus the same period one year ago, thanks to a 6.2 percentage-point increase in gross margin.

Intel's PC group stabilized nicely last quarter, which is important since the company still derives 63% of its revenue from that segment. Intel's smaller, high-growth segments hit it out of the park. Data center revenue jumped 19%, and the Internet of Things produced 24% revenue growth year over year.

While all this is hugely impressive, there was one item left out of the discussion. Now that Intel's growth is back on track, it's time to increase the dividend.

What's missing: A dividend increase
Intel is definitely committed to providing shareholders with cash returns. Along with its earnings release, management stated it would buy back $4 billion in the upcoming quarter, which is nearly double what it spent on share repurchases last quarter. What's more, management upped its share buyback authorization by an additional $20 billion.

However, Intel paid dividends of just $1.1 billion last quarter. If it doesn't increase the dividend, a full 79% of its capital allocation this quarter will be utilized on share repurchases. To get a better sense of how Intel is lagging behind in dividends, here's how it stacks up against Microsoft:

 

Dividend Yield

3-Year Dividend CAGR

YTD Payout Ratio

Microsoft

2.6%

20.5%

40%

Intel

2.6%

7.5%

48%

Source: Microsoft 3Q 10-Q, Intel 2Q Income Statement

As you can see, Intel's track record over the past few years isn't as nearly as impressive as Microsoft's. If the trend continues, Microsoft will quickly pass Intel by as a dividend stalwart.

There are two main reasons why Intel can, and should, raise its dividend. The first is that its stock price is at its highest level in a decade, which will blunt the impact of share buybacks. Share repurchases are less accretive to earnings when stock prices are at such highs. If Intel's share price was significantly lower, those share buybacks would do much more to boost future earnings per share.

The second, and more important reason, is that Intel can easily afford a dividend increase. Intel is well-known as a dividend stock in the technology sector. Its solid payout is likely what attracted investors, and also what kept investors holding on when Intel was struggling to produce growth. Intel's payout ratio is higher than Microsoft's, but it's still distributing less than half of earnings.

The bottom line
Intel is making great strides in revolutionary new technologies like the Internet of Things, as well as in data centers. It's even showing stabilization in its flagship PC segment. Put it all together, and it's clear that Intel is back on track. But one area the company hasn't given much attention to this year is its dividend. This made sense when Intel wasn't growing revenue, but times have changed.

Now that Intel is back to growth, there's little holding it back from increasing its dividend. That's especially true because it maintains a very modest payout ratio. The company has the financial flexibility to raise the dividend, and a dividend bump would serve as a nice reward for the loyal shareholders that have stuck with the stock through thick and thin.

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  • Report this Comment On July 17, 2014, at 11:53 AM, dlwatib wrote:

    The author's thesis is entirely unwarranted, as his own table clearly proves. Both Microsoft and Intel have yields of 2.6% and Intel is already paying out 48% versus Microsoft's 40%. Don't get greedy! Wait for the earnings to catch up and the payout ratio drops below 40% before bitching about increasing the dividend.

  • Report this Comment On July 17, 2014, at 12:02 PM, MayTepper wrote:

    Roth Capital Raises Intel Price Target To $38 Following Strong 2Q14 Results http://bit.ly/1pesvoh

  • Report this Comment On July 22, 2014, at 1:28 PM, Jahuel wrote:

    The 3rd Quarter of 2014 is when the dividend will increase. That way Intel can have gone 8 straight payments at exactly the same ($0.225) and still claim to have increased payments every single year, and at a steady rate. The company will likely go up to $0.24-25, and keep it there for another 2 years (8 quarters). Just my foolish prediction.

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