Few companies fetch the same level of respect and immediate brand recognition that chip giant Intel (Nasdaq: INTC), and for good reason. The company has long dominated the processor market, and its chips power the majority of computers today.
Here are three reasons to buy Intel.
1. Vertical integration
This is one of Intel's most important advantages over its competitors. While most chipmakers nowadays utilize a fabless or fab-lite business model, outsourcing production to third-party contract manufacturers, Intel remains committed to its own chip fabrication facilities. This allows it to focus heavily on next-generation manufacturing technologies while retaining that knowledge in-house.
Throughout most of this year, this has been highlighted by Taiwan Semiconductor Manufacturing's continued struggles with 28-nanometer production, which is holding back a slew of chipmakers from NVIDIA (Nasdaq: NVDA) and its Kepler PC graphics chips to Qualcomm (Nasdaq: QCOM) and its newest baseband modems or Snapdragon mobile processors, among many others. Relying on third parties has proved to be a liability in this case for those companies, which might eventually give Intel an opening to tap into their mobile markets.
Meanwhile, Intel has been shipping its 22-nanometer Ivy Bridge processors for several months now without a hitch. CEO Paul Otellini recently said that Ivy Bridge chips are already a quarter of the company's PC volume, making it the fastest production ramp ever. Intel will continue pushing the limits, as chips keep getting smaller.
This comes at a cost, foundries require billions upon billions in capital expenditures, but for Intel it's well worth it.
2: Windows 8
While Intel dominates PCs, the broader PC market is stagnating and isn't likely to catalyze future growth as it now stands. The cloud is driving healthy demand in server-bound chips, but Intel still relies heavily on its PC client group at 69% of sales last quarter. Intel's Ultrabook push, intended to reinvigorate PC sales, hasn't really moved the needle in any meaningful way, which is why Microsoft (Nasdaq: MSFT) Windows 8 will be critical for Chipzilla, in more ways than one.
Windows 8 has two possible ways to benefit Intel: renewed growth in traditional PCs as well as exposure to the burgeoning tablet market that Intel has yet to participate in. If Microsoft has its way with its prediction that users want both legacy apps and interfaces in addition to a touch-optimized one on the same device, a stark contrast to Apple's (Nasdaq: AAPL) approach of segregating the two, than Wintel have a lot to gain.
The success of the OS remains up in the air until its October release, but it could be a major catalyst for both Microsoft and Intel.
3. Value and dividend
Intel is an exemplification of a value stock. It trades at 11 times earnings, has average five-year sales growth of 8.8%, and pays out 34% of its earnings in the form of a dividend that generates a yield of 3.5%. It generates consistent operating cash flow and enjoys a rock-solid balance sheet.
Here's how it compares with other tech stalwarts.
|
Company |
P/E (TTM) |
Sales Growth (TTM) |
Dividend Yield |
Payout Ratio (TTM) |
|---|---|---|---|---|
| Intel | 11 | 12.6% | 3.5% | 34.2% |
| Microsoft | 14.9 | 5.4% | 2.7% | 39.6% |
| IBM | 14.3 | 1.5% | 1.7% | 22.1% |
| Oracle | 15.7 | 4.2% | 0.8% | 12% |
Source: Reuters. TTM = trailing 12 months.
Of the bunch, Intel boasts the lowest P/E coupled with the highest sales growth and dividend yield. Microsoft only tops its payout ratio, while IBM and Oracle look downright frugal in comparison.
For dividend and value investors looking for a tech stock, Intel is the way to go.
Still the king
While Intel has some challenges, such as transitioning to mobile devices, the current valuation shows that investors aren't even pricing in major growth yet, so any success Intel sees there is a cherry on top. When it comes to chipmakers, Intel remains a cut above the rest.
Even though Intel is a Dow dividend stock, it's not one of these three that dividend investors need to take a look at. These companies similarly boast sustainable businesses and hefty dividend payouts for shareholders. Grab your free copy today. Or to get the scoop on a stock that holds plenty of growth and dividend potential, you can check out the Fool's brand-new premium report on Apple, the iEverything powerhouse.
