Clash Of The Titans – Microsoft vs. Intel

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Feb 10, 2015
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Dividends, while bringing joy to investors, can be quite confusing when it comes to judging or deciding on a company. While lower dividend pay-outs may sound unfavourable in the short term, they are actually clues that the company has lots of scope for increasing dividends in the future. Similarly, while higher dividend pay-outs may look very attractive on the face of it, these are signals for investors that dividends may go through a rough weather in the future. Here we compare the dividends of two giants from the technology sector – Microsoft (MSFT, Financial) and Intel (INTC, Financial) and try to understand which one is healthier than the other.

What is common?

As two big companies in the technology sector, both Microsoft and Intel pay out good dividends to their investors. One of the most common phenomena found in them is that both have ventured into newer territories, moving away from their core competencies. The dividend yields are 3.1% for Microsoft and 2.9% for Intel, which are quite reasonable. However, dividend yields alone do not define the success of a company. Share prices of both the companies have undergone a lot of change in the last few months as seen from the chart below:

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With these commonalities, how do we tell which is the better dividend stock of the two? There are few other factors as well that need to be analysed like ratio of pay-outs, growth of dividends in the past and growth rate of earnings.

History of growth of dividends

Let us look at the pay-out ratios of both the companies before analysing the historical dividend growth. Pay-out ratio is the one that defines the percentage of earnings that is paid out to the investors by a company. As explained above, both low and high pay-outs can be inferred in different contexts. Currently, Intel’s pay-out ratio is 42% and Microsoft’s pay-out ratio is 46%. Both these values are based on the last year’s dividends. Since both are more or less equal, this cannot be taken as a base for comparison. These pay-outs only indicate that both the companies have a lot of room to increase their dividends in the future. Now let us look at the history of dividends growth of both the companies for the last few years:

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From the above chart, it is obvious that Microsoft has been paying a consistently higher rate of dividend over the years than Intel. Does this mean that Microsoft is a better dividend stock? Not really. Read further to understand more about the real picture.

Warding off competition

In the last few years Microsoft and Intel faced a huge pressure in their PC market due to competition from mobile operating systems from Apple (AAPL, Financial) and Google (GOOG, Financial) that were run on processors designed by ARM Holdings (ARMH, Financial). Hence they had to devise new strategies to combat this severe competition.

Microsoft took over the mobile business of Nokia (NOK, Financial) and marketed its Windows operating system heavily here. License fee for accessing Windows’ services were more than halved, free apps for MS Office was introduced on the operating systems of Android and iOS, first time usage of Office 365 was offered free of cost and free upgrades of Windows 10 were distributed to users. Due to the large amount of freebies offered as part of these marketing strategies, earnings of Microsoft suffered a blow. EPS came down by 9% and revenues came down by 13% during 2014. Earnings are expected to reduce by 7% during 2015 and then come back with a strong increase by 20% in 2016.

Intel, on the other hand, tried its hand in various subsidisation strategies like heavy discounts on Atom chips, full-fledged marketing and financial support in redesigning OEM boards and various other offers. Due to this, the mobile division of Intel reported a loss of $4.2billion during 2014. Earnings of Intel will witness a snail-paced growth of less than 2% for 2015 and around 10% during 2016.

Conclusion

With all the above factors in mind, Intel is a better dividend stock than Microsoft by a narrow margin. With a P/E of 15 as against Microsoft’s P/E of 17, Intel is in a better position because it is doesn’t have a huge share in the mobile market to be taken off by competitors. Its chips are indeed facing internal competitions and increased subsidies; however it is not looking at a large level of threatening external competition in the mobile segment like Microsoft.