Intel Corporation (INTC, Financial)—the world’s largest maker of semiconductors—finally rejoined the ranks of dividend raisers after a long hiatus. Starting in the first quarter of 2015, INTC will pay a $0.24 quarterly dividend, up from the $0.225 dividend it has paid since August of 2012. This represents a 7% bump. That’s not too shabby, but as a long-time holder of Intel stock, I’m expecting to see more in the quarters ahead.
Nine consecutive quarters without a dividend hike was a long stretch for investors in Intel stock. To find a longer streak, you’d have to go back to the late 1990s and early 2000s, when Intel stock was still a sexy growth story and the darling of both Wall Street and Silicon Valley. Today, we see a very different Intel: more mature, more shareholder friendly, and—most importantly—far more reasonably priced.
Let’s dig deeper. For most of the past two years, no one wanted to own Intel stock. It was yesterday’s news, a stodgy, old technology company that had missed the mobile revolution and hitched its wagon to a crippled horse: The Microsoft (MSFT, Financial)-dominated PC market.
To be fair, some of this criticism was warranted. Intel didn’t jump into the mobile market nearly fast enough, and it lost serious market share to Arm Holdings (ARMH, Financial), Qualcomm (QCOM, Financial) and others. INTC then had to play an aggressive game of catchup—which meant a surge of new investment and capital spending. This crimped profits and made a lot less cash available for dividends.
But then, a funny thing happened. All of that investment started to pay off, and INTC has started growing again. After three years of slugging revenue growth, INTC expects to see revenue growth in the mid-single digits next year. It helps that global PC sales stopped declining, of course. But Intel is also expected to sell about 40 million tablet chips this year.
Intel’s estimates might prove to be too conservative. Both consumers and corporate buyers have put off upgrades for years, preferring to cut costs and spend technology dollars on tablets and smartphones. But old computers eventually have to be replaced, and Barron’s reports that there are 600 million PCs currently in use that are four years old or older. And Intel’s server business is stronger than ever. Intel expects revenue growth from its server group of about 15% per year through 2018.
Let’s jump back into INTC’s dividend. At today’s prices, INTC’s $0.24 quarterly dividend represents a yield of 2.7%. That may not get your blood pumping, but it’s worth noting that it’s significantly higher than the 2.3% yields on offer on the 10-year Treasury.
I also have every reason to believe that INTC’s recent dividend hike was the start of many. Intel’s capital spending—which has been elevated for the past few years—is returning to more normal levels. This means more cash available for shareholders. It’s also worth noting that Intel’s dividend payout ratio is a modest 43%. Even if Intel’s earnings growth flatlines, there is room for further dividend growth.
Now, the fun part. Intel stock had fallen off of a lot of investors’ radars during its nine-quarter pause in raising its dividend. But we shouldn’t forget that from 2004 to 2012, INTC was a dividend-raising monster. In 2004, Intel doubled its dividend…and then doubled it again in 2005. Over the eight-year stretch, INTC raised its dividend by more than a factor of 10.
GuruFocus breaks down one of my very favorite dividend metrics, yield on cost. This is today’s annualized dividend divided by your original purchase price, or the effective dividend yield you would be enjoying on your original investment. Had you bought Intel stock five years ago, you’d be enjoying a yield on cost of 4.7%. Had you bought Intel stock ten years ago, you’d be enjoying an eye-popping yield on cost of 12.9% after a decade of 17.7% annualized growth.
Do I expect Intel stock to enjoy that kind of dividend growth over the next five or ten years? Realistically, no. Intel started at a much lower base ten years ago, and 17.7% annualized growth would be a stretch. That said, I do believe that annual dividend growth of 7%-10% is very likely.
One final consideration: While Intel has been somewhat stingy with dividend hikes in recent years, it has continued to buy its own shares on the open market. Over the past three years, INTC has repurchased about 3.6% of its shares per year. Since 2004, INTC has reduced its share count by about a quarter. So, even while Intel has been mired in slow growth, the company has still managed to take care of its shareholders. Now that the company is returning to growth, I only expect that to continue.
Disclosures: Long INTC, MSFT
