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"Intel (Nasdaq: INTC ) for income." I admit that it sounded very strange when I first said it out loud. Intel is a master of Silicon Valley, a tech revolutionary, but not a well-known dividend darling.
Oh, how times have changed -- and for the better.
Intel has become one of the bluest of blue-chip stocks, with a fabulous dividend. What's more, the company generates plenty of cash flow, giving management lots of power to keep the dividend growth going up, up, up over the next decade. Yield plus growth? What more could income investors ask for?
In Silicon Valley, Google knows search, eBay knows auctions, and Intel knows chips.
Intel makes microprocessors for desktop, laptop, and server computers. The company's crown jewel is its PC client group, which sells processors for personal computing. The segment generated $31.6 billion in sales in 2010, more than three times as much as the data center group, which makes chip for servers.
Wintel -- the industry nickname for the combination of Microsoft's (Nasdaq: MSFT ) Windows operating system and Intel's microprocessors -- has long been the dominant force in computing, and it remains strong today. Sure, AMD (NYSE: AMD ) has been a thorn in Intel's side, but that competitor has never been able to make a serious dent in Intel's leadership position. For Intel and AMD, the 80/20 rule remains intact: About 80% market share by microprocessor shipments for Intel, and about 20% for AMD. That's the way it has been and likely will be going forward. Intel is the titan of the computer processor industry.
|5-Year Dividend Growth Rate||14.5%|
|Paying a dividend without interruption since||1992|
Intel makes the most of its leadership position by generating what income investors love most: cash flow to pay the dividend. Just look at the chart below.
|Cash from operations||$10,632||$12,625||$10,926||$11,170||$16,692|
Source: Capital IQ, a division of Standard & Poor's.
Figures in millions.
Over the past five years, the company produced $62 billion in cash flow and paid shareholders an incredible $14.6 billion in dividends. Better yet, that dividend just keeps growing and growing. It's grown 14.5% on a per-share basis. Given Intel's propensity to turn its dominant position in the chip business into plenty of cash flow, I don't expect that growth to stop.
Three other factors will keep Intel's dividend healthy and growing. First, Intel ended the first quarter of 2011 with just less than $12 billion in cash, following its acquisition of security specialist McAfee. Second, even after Intel announced a 16% dividend increase last quarter, the company's payout ratio, the ratio of dividends paid to net income is still strong; it stood at just 30.6% in 2010. And lastly, management remains committed to returning capital to shareholders in the form of dividend and share repurchases. This combination gives management plenty of room to increase its quarterly dividend over time. I believe the market is overlooking those facts right now, making Intel a very attractive investment today.
Although I've made a strong case that Intel has and will have lots of cash to give back to shareholders, there are a few things that can get in the way. The biggest risk would be a steady decline in PC sales. This would cut into Intel's largest business segment, making less cash available to pass on to investors. I see acquisitions as the other biggest risk to my cash flow thesis. The jury is still out on whether the McAfee acquisition will produce the desired benefits. Another big purchase would wipe out the company's savings account, putting future dividend increases at risk.
When I think of great dividend-paying stocks, Intel isn't the first one that comes to mind. But I think that's what makes it such a great opportunity -- few investors are thinking about the company this way, today. Intel may not be the fast-growing tech company it once was, but I think its dividend is going to grow very nicely for a long time.