Intel (NASDAQ:INTC) shares soared 42% higher in 2014. Meanwhile, the semiconductor giant's quarterly dividend checks held firm at $0.225 per share, so Intel's dividend yield sank from 3.9% in February to 2.4% in December.
The company has been a dividend stalwart for many years, but recent developments have made Intel a head-scratcher for many income investors.
Before writing Intel off as a modest dividend payer, or before backing up the truck to load up on income-generating shares, Intel investors should consider these three important facts.
1. Payouts have taken a long pause from rampant growth
Intel is no stranger to putting dividend growth on the back burner when necessary.
Since starting its dividend policy in 1992, the company has delivered a constant stream of quarterly payouts. However, the company hasn't always increased its dividend payouts year over year, which is a favorite feature for dividend investors.
For example, Intel held its payouts unchanged at $0.02 per share for 14 consecutive quarters in the early 2000s. Aching from the dot-com tech crash, the company preferred to conserve its cash over those three-and-a-half years. But then, the quarterly payouts doubled to $0.04 per share in 2004 -- and again to $0.08 per share in 2005.
A shorter lull started in 2008, when the global economy was imploding. Intel's dividend checks stayed put at $0.14 per share for seven consecutive quarters.
That brings us to the most recent pause in Intel's dividend boosts, which happens to be going on right now. Intel's latest dividend increase happened in the summer of 2012, when the payouts increased by 7% year over year to $0.225 per share. The stock has been stuck at that annual payout of $0.90 per share ever since. That's 10 quarters and counting.
So if you're looking for a bona fide dividend aristocrat, which can be expected to raise its dividend payouts without fail for decades on end, Intel isn't for you. Intel's board of directors prefers a flexible approach, so you may run into long dry spells without dividend boosts along the way.
On the other hand, when Intel is raising its payouts, they tend to grow quickly. Quadrupling the dividend checks in two years to make up for over three years of frozen payouts? No problem. Delivering a tenfold total increase since 2003, extended breaks and all? Sure thing:
In other words, good things come to those who wait. In Intel's case, dividend investors with a thirst for larger payouts may be left hanging for years and years, but the dividend still grows quickly over the long run.
2. Intel is investing billions in other cash flow targets
When Intel isn't boosting its dividend budgets, the company has a couple of favorite alternative cash-flow destinations.
For one, Intel is buying back its own stock at a dizzying pace. Over the last four reported quarters, the company has invested $5.8 billion in share buybacks. That's up from just $850 million in fiscal year 2013. This sudden splurge has reduced Intel's share count by 1.5% since the spring of 2014.
That's not exactly a new strategy for Intel, either. Despite headwinds from a generous share-based compensation policy, which printed out $1.1 billion worth of new shares over the last year, the diluted share count has trended 21% lower in the past decade and 11% lower in five years.
When share buybacks go beyond simply canceling out the dilutive effects of issuing new shares, it's tantamount to shoveling cash into shareholders' pockets. Buybacks aren't always the right strategy, or the most shareholder-friendly, but it's a popular alternative to raising dividends.
The other alternative on Intel's plate is very simple: Holding back on dividend growth lets the company invest more in growing the actual business.
Intel sports one of America's biggest capital expense accounts. Stopping at $11 billion over the last four quarters, Intel is third behind telecom giants AT&T (NYSE:T) and Verizon (NYSE:VZ), with capital expenses that have soared to $22 billion and $17 billion, respectively, according to Capital IQ data .
Verizon and AT&T invest their massive capital budgets in maintaining, improving, and expanding their communications networks. Whether wired or wireless, this is expansive stuff on a national scale.
Intel runs surprisingly close to the telecoms, though. For this company, capital expenses are all about maintaining, expanding, and upgrading its chip-making facilities.
Intel isn't just doing the upkeep on its existing chip factories. The firm has invested $4 billion in brand-new equipment over the last year.
Intel's management and board of directors clearly see growth opportunities on the horizon, big enough to invest $4 billion a year in them. The company is opening up new facilities in places like China and Israel, moving on to the next level of more compact and efficient chip architectures, and betting big on mobile chip designs.
If you think it's a waste of money, better invested into larger dividends, then Intel may not be the stock for you. On the other hand, if you like the growth prospects implied in Intel's big growth investments as a complement to steady dividend checks, you might want to own the stock.
"We believe it is in the best interest of stockholders to reinvest our earnings into the future of the company in research and development," Intel said. I agree wholeheartedly.
3. Dividends nearly doubled Intel's returns over the past decade
Finally, let me point out that the true measure of an effective dividend is how it boosts shareholder returns in the long run.
Let's say you bought some Intel shares 10 years ago. In terms of plain share price gains, you'd be looking back at a 54% gain over 10 years -- behind the S&P 500 (SNPINDEX:^GSPC) and its 70% returns.
But if you had reinvested the dividends in more Intel shares along the way, using Intel's own dividend reinvestment program or a similar solution from your broker, your investment would almost have kept up with the S&P 500's 109% total return:
In other words, leaning on Intel's dividends through thick and thin with a steady dividend reinvestment strategy would have nearly doubled your decade-long returns. Past performance is no guarantee of future miracles and so forth, but it's safe to say that Intel's dividends make a big difference for its shareholders -- flaws and all.