Why I'm Buying this Tech Giant
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past few weeks I’ve been busy buying some very easy to understand companies for my “No Drip, No Mess” Portfolio. Today, I’m looking to mix things up a bit and add the first technology company to the portfolio. With tech making up over 17% of the S&P, we are currently well underweight so there will be more where this came from.
Our first venture into the technology space is in a name investors should know very well. Intel (NASDAQ: INTC) manufactures a vast array of products for the computer and communications industry. From microprocessors to chipsets, motherboards to flash memory, Intel provides the brains for our technology to work. They are by far the market leader with an 80%+ market share compared to rival Advanced Micro Devices (NYSE: AMD) and are slowly but surely breaking into the fast growing mobile chip space.
If there is any concern with the future at Intel it comes from the shift from personal computers to smart phones and tablets. With the dramatic rise of the iPhone and iPad from Apple (NASDAQ: AAPL), investors remain concerned that Intel will be left in the dust. ARM Holdings (NASDAQ: ARMH) currently dominates the mobile chip industry, while Intel has been viewed as being too late and now unable to make up ground. But this is Intel, the same company that pumps more into R&D each year than AMD and ARM generate in revenue!
Intel has built incredible scale in part due to their philosophy of vertical integration. While ARM and AMD use contract manufactures to improve margins and stay nimble, they are hindered by production constraints and lack of control. Intel’s full control of the value chain affords them the ability to make smart long term investments to dominate thanks to their incredible economies of scale.
It’s their scale that will open doors. Intel already has one foot in the door at Apple as they supply the chips for Macs. Given their current focus on mobile through their Atom line it’s only a matter of time before they combine their technological advances with their scale to make a product so compelling that they’ll force the hand of a company like Apple. While mobile isn’t core to my thesis for Intel, I do think the market is vastly undervaluing their ability to dominate here as well.
Not only is Intel a chip building machine, but they are a financial machine that manufactures an unbelievable amount of cash. In 2011 they generated $54 billion in revenue, which has been growing by 8% annually for the past five years. Earnings have been growing at a more brisk 20% annually over the same timeframe, but do project to slow to high single digits over the next couple of years. Intel is a cash cow and last year they generated over $20 billion in cash from operations and increasingly have been returning it to shareholders. They started paying a dividend before it was popular among tech companies. Over the past decade they’ve returned about $80 billion to shareholders in buybacks and dividends and currently have well over a 3% dividend yield. They’ve raised their dividend by a compound annual rate of 30% over that decade. More than anything else it’s their cash flow that interests me the most.
The Trade:
I see Intel as a core position for the portfolio, eventually being built up to a full 5% allocation. The plan is to start by writing puts to pick up our first set of shares and then strangle the shares, picking up the dividend and options income while moving up the strikes as we see some capital gains. For the initial trade we’ll write one October $25 put for around $100. While we’d only be picking up shares for about 4% cheaper in addition to the 4% of option income, I have no problem picking up this exceptionally stable company at that level. In addition to the nice option income we can generate from Intel, we’ll also enjoy that nice 3.4% dividend I mentioned. In time we’ll offset the stability of Intel with a company that has the potential to be the next Intel.
latimerburned owns shares of Apple and has the following options: Bull Call Spread on Apple. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
