Drip Portfolio Report
Wednesday, August 20, 1997
by Jeff Fischer (TMF Jeff)
ALEXANDRIA, VA (Aug. 20, 1997) -- To build a diversified portfolio we aim to invest in the financial, computer, health, communication, food and beverage, and probably oil and construction industries. It's appropriate that our first investment is in the computer industry, as the computer has made this portfolio and The Motley Fool Online possible. All of us reading these words probably use a computer every day.
Last year Intel celebrated the 25th anniversary of its invention of the microprocessor. The 25th anniversary of the automobile was celebrated in 1933, and at that time some people wondered if auto investments still offered growth potential. People wrote the same about Coca-Cola in 1940 -- it was "too late." Some say that Intel's glory days are behind it, too, though personal computers just entered the picture in 1980, or 6,100 days ago.
Over the next twenty years, Intel will probably be our most volatile investment -- as technology stocks tend to be -- but we wouldn't be surprised to see it become our most successful investment within our diversified portfolio.
Diversified but not over-diversified is the goal. Before the year is over we should own and be investing in five companies, and before too long we'll probably own seven to eight. It's doubtful that we'll ever own more than that, so within each industry we want to invest in the leader. We have our checklist of qualities that we want to see in each investment initially. We want our companies to be:
1. Cash rich and debt free.
2. Consistently growing annual earnings by double digits.
3. Consistently improving return on equity and other performance measures.
4. Consistently repurchasing shares.
5. Sporting double-digit net profit margins.
6. Attracting and retaining top quality management.
7. Industry dominant.
8. And all of this: Sustainable.
And, as before, the additional "big mama" bonus to look for in a 20-year investment:
1. A repeat purchase, consumer-oriented business.
INTEL (Nasdaq: INTC) matches all of these, and arguably meets the "big mama" bonus, too. Intel has turned itself into a recognizable consumer brand through its "Intel Inside" campaign. Is it a repeat purchase business? Some people own a pair of Nike shoes longer than they own a computer before upgrading it. It's difficult to call Intel's products outright repeat purchase items, but it is a consumer business and if you're using a 33 MHz computer right now, you're aching for a faster one.
Let's run Intel through the paces:
1. Cash rich and debt free. Intel has $8.3 billion in cash and no significant debt. With $5 per share in cash, the stock has a book value of nearly $11 a share.
2. Consistently growing annual earnings by double digits. Sales at Intel have risen 33% annually over the past ten years, and earnings have followed suit. The company is expected to grow 20% annually over the next five years. We're betting that over the next twenty years Intel can average double-digit earnings growth annually.
3. Consistently improving return on equity and other performance measures. Intel has steadily increased return on equity, from 20% in 1987 to 30% in 1993, to 44% in the last quarter. One common concern about Intel's business is that it is capital intensive, meaning that Intel needs to spend large amounts of money to continue its operations and fuel growth. In reality, Randy Befumo points out that Intel isn't much more capital intensive than -- yes -- COCA-COLA (NYSE: KO). Last year Intel spent 30% of its earnings before income taxes on capital expenditures, while Coca-Cola spent 21% of its earnings before taxes on the same.
4. Consistently repurchasing shares. From 1990 to the beginning of 1996 Intel repurchased 70 million of its own shares, and in the past two quarters it has repurchased 20 million more. The company plans to continue the policy, and with over $8 billion in cash it can do so with room to spare.
5. Sporting double-digit profit margins. Gross profit margins at the company have climbed from 30% in 1985 to 56% last year, while net profit margins have climbed to 28%. For every dollar of sales, the company puts 28 cents in the bank. Few -- if any -- companies with $23 billion in trailing sales have such strong profit margins. Price cuts could bring margins down and Intel would still be in an enviable position.
6. Attracting and retaining top quality management. From Andy Grove to Greg Moore, Intel is admired and is able to recruit and retain industry-leading management. There's no apparent reason why this would change as long as Intel continues to lead its industry and challenges and rewards its people as they work to shape the future of computers.
7. Industry dominant. Intel is inside over 80% of the computers in the world, and even as ADVANCED MICRO DEVICES (NYSE: AMD) and other competitors nibble at Intel's market share -- as is to be expected -- Intel's leadership position is highly defensible. The company spends as much on research and development as its competition earns in revenues each year, while the competition doesn't have the resources to fulfill the world's demand in the volume that Intel does. Price cuts by competition can force Intel to do the same, but its industry dominance is arguably as complete as Microsoft's.
8. And all of this: Sustainable. Computer sales are expected to increase 20% annually out to the year 2000, and Intel is expected to grow at least at the industry rate. Although it's unlikely that margins can continue to improve, they should continue to be strong. We are investing, obviously, on the belief that Intel can grow, on average, at a market-beating pace over the next twenty years -- including the inevitable "down" years. The computer and Internet boom has only just begun, and Intel is in a great position to benefit -- we think. But hey. We're just a couple o' Fools. As always, make your own decisions!
Intel on the Web: Intel's website (www.intel.com) has an abundance of investor friendly information about Intel, including the company's strategy for growth, the entire 1996 annual report, an index of financial statements, complete Intel facts & FAQ's, and, of course, investor relations information.
The website also offers information about Intel's Dividend Reinvestment Plan. We'll be sending our money to Moneypaper's "Temper of the Times" service after filling out the one page form. If you're interested in beginning a DRP and want to know how, please see the end of Friday's Drip Port recap.
After you own one share of Intel stock in your name and you enroll in the DRP plan, Intel allows investments of $25 to $15,000 per month, free of charge. Intel's transfer agent for its plan is Harris Trust and Savings Bank. Information can be requested from:
Harris Trust and Savings Bank
Dividend Reinvestment/Stock Purchase Plan
P.O. Box A3309
Chicago, IL 60690
phone: (312) 461-5545
Tomorrow we'll look at some of the risks that Intel faces, and we're going to fill out and mail our form to enroll in its Drip Plan. (Nice combination, eh? Risks are a part of life, though. You can't act without taking risks). If there are any confusing parts about our enrollment process, we'll cover it.
--Jeff Fischer, Fool
(Please see the left navigation bar for information on this new portfolio.)