Check out the latest Intel earnings call transcript.

Chip giant Intel (NASDAQ:INTC) is an incredibly profitable company that generates a substantial amount of free cash flow. This allows it to return a significant amount of cash to its shareholders through a combination of both quarterly cash dividends as well as share repurchases. 

Indeed, over the course of 2018, Intel doled out $5.5 billion in dividends and repurchased $10.7 billion worth of shares. As the company noted in its Jan. 24 earnings presentation, it gave back 114% of its free cash flow for the year to stockholders.

A man and a woman handing the viewer stacks of cash.

Image source: Getty Images.

In addition to its results for the fourth quarter of 2018, the company also announced a 5% boost to its quarterly dividend, to $0.315 per share. While investors should, of course, welcome a raise, I don't think this dividend boost goes far enough. Allow me to explain.

Intel can do better

According to Intel's earnings presentation, it generated $14.3 billion worth of free cash flow over the course of 2018. This was an absolutely enormous increase -- 38.8% --  from its $10.3 billion free cash flow in 2017. Moreover, the company expects $16 billion free cash flow in 2019, which represents a roughly 11.9% increase. 

For some perspective, in the beginning of 2018, its quarterly dividend went from $0.2725 per share to $0.30, or a 10% jump. That increase came before the company raised its revenue and profit guidance three times in a row in 2018. Now, after Intel enjoyed a much better-than-expected 2018 (at least compared to what it had expected when it raised its dividend early in the year) and is on track to deliver another year of pretty significant free cash flow growth, Intel boosted its calendar 2019 dividend by a meager 5%? 

Also, consider that some of Intel's other dividend-paying, large-cap semiconductor peers have been quite generous in their respective dividend increases. Texas Instruments (NASDAQ:TXN), for example, recently upped its dividend by 24.2% and Broadcom (NASDAQ:AVGO) offered its shareholders a 51% dividend raise. Intel's 5% increase, especially following its 2018 performance and considering its guidance for 2019, simply falls flat.

Moreover, as of writing, Intel stock most recently traded at $46.22 per share. A quarterly dividend of $0.315 per share translates into an annualized dividend yield of just 2.73%. Texas Instruments' dividend yield is a more generous 3.33% while Broadcom's stands at an impressive 4.02%. 

Considering the nature of Intel stock -- it's a slow-growth large-cap semiconductor company (the company's revenue guidance for 2019 calls for less than 1% revenue growth compared to 2018 levels) -- I'd argue that the company should be more aggressive with its dividend program to attract more income-oriented investors also looking for exposure to the semiconductor industry.

Investor takeaway

Going into Intel's earnings release, there was no doubt in my mind that we'd see a dividend increase. However, I'm ultimately disappointed that shareholders didn't get a bigger raise. The company's free cash flow guidance for 2019 suggests that it could easily support a much more attractive dividend than what it currently offers, but it seems that its capital allocation priorities lie elsewhere.