Intel (INTC 0.12%) is a member of the Dow Jones Industrial Average, and the company finds itself at a critical juncture following a headline-grabbing 2020. After a year of operational challenges and two steep drops in share price, new CEO Pat Gelsinger will shortly take the reins of the microchip giant in hopes of executing a strategic turnaround. This could deliver a nice bump for Intel shareholders over the year or two, but even that potential growth might not make it a better buy than simply holding the entire Dow Jones.
Index investing can be a great way to diversify and reduce risk, but it usually means sacrificing some of the upside potential of a more focused portfolio of individual stocks. Investors who are considering Intel over the Dow 30 need to determine if Intel's upside potential is large enough to justify foregoing the reduced risk and volatility provided by a diversified index.
Intel at a crossroads
In 2020, Intel experienced some erosion of its dominant market position. Resurgent archrival AMD (AMD 2.43%) gained ground, and other competitors also outperformed the chip giant.
Intel is also dealing with the challenge that major customers like Apple (NASDAQ: AAPL) and Microsoft (MSFT 1.59%) are starting to design microchips for their own products in house.
Image source: Getty Images
Last July, the company disappointed investors by announcing that the release of its next-generation 7-nanometer chips would be delayed by a full year. The semiconductor industry is highly competitive, and Intel had previously struggled to keep pace with its peers in the prior 10-nanometer generation of chips. Being a laggard in the rollout of next-generation chips will not only hurt sales, but will also impact pricing and profit margins. News of the delay contributed to the shares falling 20% in July.
The trouble continued in October after Intel reported mixed third-quarter results with worrisome commentary. The company exceeded sales expectations and raised its guidance, but it fell short on GAAP profits, and there was a major decline in demand among data center customers. After two big sell-offs, activist investors from the hedge fund Third Point stepped in and demanded changes from Intel's management to fix the problems that have plagued the semiconductor giant. That involvement led to the board tapping a new CEO, and investors will hope that Intel can recover some of its lost market dominance.
Image and data source: Ycharts
At this point, Intel's valuation metrics appear relatively cheap for any optimistic investors. The stock trades at a forward P/E ratio of 12.3, which is fairly low in the current market. Its enterprise-value-to-EBITDA ratio of 6.4 is also attractive. That indicates that there's room for the stock to appreciate. However, its 2.3% dividend yield at current share prices is somewhat mediocre, and that's especially relevant for a mature, low-growth company like this one.
Diversification without sacrificing growth
Owning an index rather than a single stock comes with benefits and disadvantages. Diversification dilutes the degree to which any individual faltering company can drag down your entire portfolio, so owning a large number of stocks is good for reducing volatility. However, it also puts a cap on how much impact any single big winner can have on your total returns.
Intel might outperform the market if its current strategic shift successfully reestablishes the company's market dominance. However, Intel isn't likely to generate huge returns for investors through rapid sales or earnings growth. Owning the other 29 stocks in the Dow Jones Industrial Index probably won't limit portfolio growth relative to Intel, but it will greatly reduce risk and volatility. The Dow is spread out across numerous sectors, and it still provides plenty of exposure to growth areas such as tech, pharmaceuticals, and consumer cyclical stocks. Moreover, investors can use ETFs such as the SPDR Dow Jones Industrial Average ETF Trust (DIA 0.36%) to easily buy the whole index and receive dividend distributions that currently yield 1.8%, not too far below Intel's yield.
It's hard to identify a clear advantage that Intel shares have over a portfolio of all 30 Dow Jones stocks, but the index provides an undeniable edge in risk reduction.
