After Failing to Increase its Dividend, Should Intel Investors Worry?

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many investors follow dividend developments seriously, and for good reason. There’s perhaps no better signal of management optimism (or pessimism) for the future than a company that increases (or cuts) its dividend.

Stocks that establish long-term track records of raising payouts on an annual basis develop a sense of loyalty from their investors, who become accustomed to regular distribution increases. Unfortunately, Intel (NASDAQ: INTC) did not increase its dividend, as many had expected.

Better than a dividend cut, but not nearly as good as an increase

Clearly, the worst of all scenarios is when a company cuts its dividend. Under those conditions, particularly when it is unexpected, investors usually receive a double-dose of pain in the form of lost income as well as a significant drop in share price.

Intel maintained its quarterly dividend, at $0.225 per share, but it had been a year since its last dividend bump.

The most surprising part is that technology companies primarily have the financial flexibility to raise dividends. Tech stocks, including Intel but also Microsoft (NASDAQ: MSFT) and Cisco Systems (NASDAQ: CSCO), hold large amounts of cash on the books, with very little debt to service and entirely manageable capital expenditures.

Realizing this, management teams of these firms have embraced investors’ desire for steady income. In turn, Microsoft and Cisco have both aggressively ratcheted up their payouts in recent years.

Microsoft raised its distribution by 15% late last year, following a 25% dividend raise the year prior. For its part, Cisco instituted a dividend in 2011 and has nearly tripled it since then.

Both Microsoft and Cisco yield in excess of 2.5% annualized, significantly better than the roughly 2% yield on the broader market.

And, due to these stocks’ tremendous profitability, their payouts are still reasonable as a percentage of earnings. Microsoft and Cisco both hold payout ratios of less than 40%, meaning future dividend increases are extremely likely.

Because of this, these tech stocks have become something of a haven for dividend enthusiasts.

A bump in the road, or something more serious?

When I last wrote about Intel, I predicted the company would raise its dividend when it declared its next quarterly payout. I had assumed the company was intent on raising its dividend every year, as it had been four quarters since its last dividend increase.

Unfortunately, I was wrong, and Intel decided to simply maintain its payout rather than increase it. There are a few likely reasons for this.

First, clearly management is cautious about the near future. Intel is a $115 billion company by market value that is trying to shift its focus into a new arena. It takes a lot of time (and more importantly, money) to turn around a ship of this size. For the time being, management is obviously more focused on saving cash to fund continuing R&D in the pursuit of getting its chips into mobile devices.

This is a very important development for the future well-being of Intel’s business. Growth in computing is clearly in mobile devices and not personal computers, and Intel has been late to the game.

Nowhere is the sense of urgency more evident than in Intel’s earnings reports in recent quarters. The company’s latest quarterly report was disappointing at best: Revenue and diluted earnings per share fell 3% and 25%, respectively, year over year.

Next, Intel’s yield was already significantly higher than both the broader market, as well as most other large-cap technology stocks. At current prices, Intel’s yield was near 4%. Management likely saw this as a satisfactory yield for the time being.

And, let’s not forget Intel management’s tendency to approve dividend increases outside of the tried-and-true every four quarters strategy.

Looking back, we can see Intel’s pattern of dividend increases varies from year to year. Intel froze its payout for seven consecutive quarters in 2008-2009. Then, Intel went on a dividend-raising spree, bumping up its payout four times over the next 11 quarters.

At the end of the day, I’d advise investors against doing anything rash in light of Intel’s dividend disappointment. Intel may decide, assuming business conditions firm, that a dividend increase over the next couple quarters is appropriate.

That being said, if Intel goes the next four quarters without bumping up its payout, then investors may have reason to worry. Remain cautious, but continue to hold Intel.

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Robert Ciura owns shares of Intel. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of Intel and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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