This Tech Giant is a Dividend Machine

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

Tech stocks are historically not known for being great dividend stocks. Recently, however, some behemoths of tech have begun raising their dividends substantially. One of these companies is Intel (NASDAQ: INTC). Intel has actually been consistently raising its dividend for the last decade, but a stagnant stock price has caused the yield to rise over time.

<img src="http://media.ycharts.com/charts/097dc1796583d59746a7c059a6d25136.png" />

INTC data by YCharts

<img src="http://media.ycharts.com/charts/5c3d37796bf41cc419b5d5844d90867f.png" />

INTC Dividend Yield data by YCharts

The stock has been largely range-bound since the burst of the dot-com bubble, leading to an ever increasing dividend yield. The yield has nearly doubled since the beginning of 2008, currently just short of 4%. For a company like Intel, this is astounding. Intel dominates the processor market for personal computers, competing with much smaller rival Advanced Micro Devices (NYSE: AMD). In terms of revenue, Intel is a factor of 8.5 bigger than AMD. AMD has faced challenges as of late and pays no dividend.

In the mobile space Intel is well behind rivals using the ARM architecture from ARM Holdings (NASDAQ: ARMH). The ARM architecture is well suited for low-power applications, making it ideal for use in smart phones and tablets. While ARM Holdings simply licenses its architecture, companies like Qualcomm (NASDAQ: QCOM) and Texas Instruments (NASDAQ:TXN) manufacture chips using it. A vast majority of mobile devices use ARM chips today, but Intel has begun to make inroads.

Compared to all of these companies, Intel is not only the largest but also offers by far the best dividend.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Revenue (Mil)</strong></td> <td><strong>Dividend Yield</strong></td> </tr> <tr> <td><strong>INTC</strong></td> <td>$54,527</td> <td>3.94%</td> </tr> <tr> <td><strong>AMD</strong></td> <td>$6,379</td> <td>0%</td> </tr> <tr> <td><strong>ARMH</strong></td> <td>$849</td> <td>0.50%</td> </tr> <tr> <td><strong>QCOM</strong></td> <td>$18,368</td> <td>1.62%</td> </tr> <tr> <td><strong>TXN</strong></td> <td>$13,342</td> <td>3.04%</td> </tr> </tbody> </table>


Dividend History

In addition to the yield the dividend growth rate is equally important. Here is the 10-year dividend history for Intel.

<table> <tbody> <tr> <td><strong>Year</strong></td> <td><strong>Dividend</strong></td> <td><strong>Growth</strong></td> </tr> <tr> <td><strong>2003</strong></td> <td>$0.08</td> <td>0%</td> </tr> <tr> <td><strong>2004</strong></td> <td>$0.16</td> <td>100%</td> </tr> <tr> <td><strong>2005</strong></td> <td>$0.32</td> <td>100%</td> </tr> <tr> <td><strong>2006</strong></td> <td>$0.40</td> <td>25%</td> </tr> <tr> <td><strong>2007</strong></td> <td>$0.45</td> <td>12.5%</td> </tr> <tr> <td><strong>2008</strong></td> <td>$0.5475</td> <td>21.67%</td> </tr> <tr> <td><strong>2009</strong></td> <td>$0.56</td> <td>2.28%</td> </tr> <tr> <td><strong>2010</strong></td> <td>$0.63</td> <td>12.5%</td> </tr> <tr> <td><strong>2011</strong></td> <td>$0.7824</td> <td>24.19%</td> </tr> <tr> <td><strong>2012</strong></td> <td>$0.87</td> <td>11.2%</td> </tr> </tbody> </table>

With the exception of 2009 Intel has grown its dividend at a break-neck pace. The average growth rate since 2006 is 15.6%. This is important because a growing dividend means a growing income stream, and if those dividends are reinvested the growth is multiplied even further.

Payout Ratio

The picture so far looks like this: An industry leading company with a 4% yield and a 15% dividend growth rate. The last thing we need to do before valuing Intel is to determine the sustainability of the dividend. The payout ratio, which I'll define as the total dividend paid divided by the free cash flow, tells us how much of Intel's cash flow goes towards dividends. A high ratio would indicate that the dividend could be at risk of being cut. Here is the ten-year history of Intel's payout ratio.  

<table> <tbody> <tr> <td><strong>Year</strong></td> <td><strong>FCF (Mil)</strong></td> <td><strong>Payout Ratio</strong></td> </tr> <tr> <td><strong>2003</strong></td> <td>$7,859</td> <td>33.7%</td> </tr> <tr> <td><strong>2004</strong></td> <td>$9,276</td> <td>31.5%</td> </tr> <tr> <td><strong>2005</strong></td> <td>$9,005</td> <td>37.56%</td> </tr> <tr> <td><strong>2006</strong></td> <td>$4,841</td> <td>68.02%</td> </tr> <tr> <td><strong>2007</strong></td> <td>$7,625</td> <td>35.03%</td> </tr> <tr> <td><strong>2008</strong></td> <td>$5,729</td> <td>54.93%</td> </tr> <tr> <td><strong>2009</strong></td> <td>$6,655</td> <td>47.50%</td> </tr> <tr> <td><strong>2010</strong></td> <td>$11,485</td> <td>31.24%</td> </tr> <tr> <td><strong>2011</strong></td> <td>$10,199</td> <td>41.51%</td> </tr> </tbody> </table>

The payout ratio has been a little erratic, but in most years it has been between 30-50%. These are perfectly sustainable values, and Intel should have no problem maintaining its dividend.

Valuation

To estimate the fair value of a share of Intel I will use the dividend discount model. This model assumes that the value of the company is solely the value of all future dividend payments. This method is reasonable for a dividend investor focused mainly on generating an income stream. I will use a discount rate of 8%, which is roughly the long term growth rate of the market. I will assume that the dividend will grow at 10% next year and allow that growth rate to decay uniformly over 20 years to a perpetual growth rate of 3%. This is substantially lower than the historical growth rate. Using these parameters I arrive at a fair value estimate of $31 per share.

The Bottom Line

Currently trading around $23 per share, Intel can be bought for a 25% discount to my fair value estimate. The opportunity to get such a high-quality dividend for such a low price does not come by very often. There's just one question that you have to ask yourself - Does your portfolio have Intel Inside?  


TheBargainBin has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. 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.

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