High Dividend Dog With Capital Bonus

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

The last couple of years have been tough for PC semiconductor companies. Intel (NASDAQ: INTC) has lost almost 20% of its value in the last 52 weeks and AMD has lost 63% of its value in the same period. This slump in value is driven by falling PC sales and increasing consumer love for handhelds. These companies have suffered because they failed to react quickly enough to the changing industry dynamics. Where Intel has been able to drive some growth from its enterprise segment, AMD’s inability to diversify has been the reason behind its doom.

Intel has taken a number of steps in the recent past which indicate that there are good times ahead for its investors. The recent launch of Microsoft’s (NASDAQ: MSFT) Windows 8 has been lackluster so far but not a failure by any definition. The new operating system has not been able to gain traction because there was a lack of hardware that could deliver the full consumer experience Windows 8 has been designed to deliver. I believe Windows 8 will gain consumer favor and it would be a big benefit to Intel, which still derives the majority of its revenues from PC sales. While it waits for a PC comeback, Intel is focusing on the ‘value smartphone’ segment, which mostly runs Google’s (NASDAQ: GOOG) Android.

Mobile Segment

Where Intel has suffered from the rising popularity of handhelds other players focusing on low power chips have prospered. The company has recently decided to rebrand its entire mobile segment by giving it the highly successful logo of ‘Intel Inside.’ While this was a highly successful campaign in the PC industry it might not be so effective on the smartphone landscape. This is primarily due to the limited space available on a smartphone which the manufacturer and carrier try to keep for themselves.

The core competency of Intel has always been its faster and more efficient processor. The world’s largest semiconductor maker aims to focus on the same for its mobile ambitions. It has released two new smartphone platforms, namely Medfield and Lexington, which would target low end smartphones. Intel plans to launch the dual-core Atom Z2420 later this month in a bid to attract value smartphone customers. The value smartphone market is dominated by Android so all this is for nothing if these new products cannot support the world’s largest smartphone OS.  

Therefore despite a long standing relationship with Windows in the PC industry, Google’s Android remains a key to success for Intel in the smartphone industry. The users of Intel’s x86 can now install the world’s largest smartphone OS on their devices and this can be the missing link in its turnaround efforts.  

I believe the company is all set to dominate the low end smartphone market. While it is a low margin market the growth rates are almost double as compared to the high end mobile market. According to IHS, international low-end smartphone shipments will reach 559 million units in the next 3 years from the current 206 million. This is an extremely high growth rate of 51%, almost double the 26% growth rate expected from high end smartphones.

Conclusion

Intel has lagged far behind smartphone semiconductor companies, but I believe it is finally heading in the right direction. The company is focusing on the same core competencies that made it a giant and dominant force in the PC industry. The stock is currently trading at a 10% discount to its mean sell side target price and offers an amazing dividend yield of 4.2%. It is an attractive dividend play and offers a capital bonus at this valuation.  I am highly optimistic about the low value smartphone strategy of Intel and I believe it will be able to carve out a significant portion from this space. Based on this analysis I would recommend investors take advantage of its price and buy this Dog of the Dow. 


SmartEquity has no position in any stocks mentioned. The Motley Fool recommends Google and Intel. The Motley Fool owns shares of Google, 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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