Intel Dividend - Slowing Or Growing
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Technology companies have traditionally stayed away from paying dividends while in their fast growth phase. In fact, I've read articles in the past saying, once a company decides to plow a lot of money into paying dividends and buying back shares, you have to be concerned that the fast growth days are over. I'm here to tell you, that's not always a bad thing.
Take Intel (NASDAQ: INTC) for example. This company was a fast growing chip maker during the early 90's and into year 2000. The company did pay a dividend, but during that time the dividend was paid, then cut in half, raised, and lowered multiple times. Investors didn't seem to care as the stock traded from under $2 a share, all the way up to an all-time high of near $75. Since then, the stock has traded in a range of $13 – $35 and the dividend has been consistently raised. The question is, as Intel matures is the company slowing down or speeding up dividend growth?
An article out today, shows Intel increasing its dividend by 7.1% for the 3rd dividend increase in the last 18 months. While this has not been Intel's normal practice, I'm sure no shareholder is complaining. With the company dominating the desktop, laptop, and server markets, and new pushes into smartphones and “other new growth areas” (think tablets), Intel sees record revenue for 2012. While competitor ARM Holdings (NASDAQ: ARMH) pays a dividend, their record of dividends is nothing compared to Intel. While ARM is still arguably in its growth stage, Intel is a more mature company. You can tell this by the fact that ARM is expected to grow earnings at over 18%, versus Intel is expected to grow by 11.8%.
Before we get to whether the dividend is growing or slowing, we need to determine if Intel can afford to pay its current dividend. In the last three years, Intel's free cash flow payout percentage has actually dropped from about 46% to 40%. This is amazing considering that Intel more than doubled its capital expenditures from 2009 to 2011. With a 40% free cash flow payout ratio, Intel seems to have plenty of room for more increases. Intel is only expected to increase earnings by about 4% this year. However, last year earnings increased by 12.9%, but cash flow jumped more than 25%. If earnings grow 4% and this same ratio holds, than cash flow should increase by at least 8%. This would give Intel operating cash flow of about $22.64 billion. With capital expenditures expected at $12.4 billion, this leaves $10.24 billion in free cash flow. The current dividend cost is $4.5 billion, which means Intel's forward free cash flow payout ratio is just 43.95%. Clearly the dividend is well covered.
Now that we know the dividend can be paid, what is the trend in dividend payments? Let's look at dividend growth in the last 10 years to get an idea:
You can see that when Intel began this string of dividend increases, the company made some major percentage increases early on. While the last few years can't match those huge initial increases, there is a definite uptrend in the last 4 years. In fact, including the most recent increase, Intel has now raised their dividend over 20% in the last 12 months. It seems like the dividend growth which had been slowing down has started to speed up again.
Intel investors should probably expect somewhere between 15-20% dividend growth going forward. The reason the company felt comfortable raising the dividend so much in the last 18 months has a lot to do with targeted payout percentages. Intel seems to be comfortable paying out something up to 45-50% in free cash flow. In the last three years this ratio dropped from 46% down to 40% so the company had room to raise the dividend by a more substantial amount. With EPS growth expected at around 10% in the next few years, cash flow should move up by 15-20%. With Intel trying to keep its free cash flow payout ratio somewhere below 50%, dividend increases should track cash flow. Intel has long lead the way when it comes to desktop, laptop, and server chips. If the company is successful in making inroads into the smartphone and tablet market, not only will investors likely see a higher growth rate, but this 15-20% expected dividend growth could increase as well. Let me know what you think of Intel in the comments section below.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend 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.