Intel (NASDAQ: INTC) is one of the most well-known dividend stocks. There’s good reason for this, since Intel’s nearly 3% dividend yield is one of the highest in the Dow Jones Industrial Average. Intel’s dividend is also a rare gem because Intel is a technology company, a sector that has historically not been a good source of yield.
But times are changing fast. After the bursting of the tech bubble, many technology companies began to offer dividends. And not just token yields, either, but rather substantial yields. Intel is a prime example of this.
Over the past five years, Intel increased its dividend by 8% per year on average. This has vaulted Intel into an elite status as a top dividend stock in the technology sector.
The key reason for Intel’s rapid dividend growth is because it generates a lot of free cash flow. This is something many technology companies have in common, which explains the number of technology companies that have enacted dividend programs over the past several years.
For example, Intel raked in $2.3 billion of free cash flow just last quarter. Technology companies like Intel typically have low capital expenditure requirements, which results in strong free cash flow.
All that cash is really starting to pile up. At the end of last quarter, Intel held $6.1 billion in cash and short-term investments on its balance sheet, and another $6.5 billion in long-term marketable securities.
At the same time, Intel has very little debt. The company carries a very modest 22% long-term debt-to-equity ratio. This means Intel can easily afford to distribute a significant chunk of its cash flow as a dividend.
The Critical Question
Intel’s dividend cost $1.1 billion, which equates to less than half the company’s free cash flow. That will allow for continued dividend growth, but exactly how much depends on whether Intel grows earnings. This is a critical question for Intel that does not appear to have a clear answer.
Intel is the world’s largest semiconductor company. It’s the industry leader in personal computer chips, but the PC is a slowing industry. The prevalence of mobile computing through smartphones and tablets is a direct threat to the PC industry. Moreover, global PC shipments are still falling, which puts Intel’s future growth in jeopardy.
Consider that Intel’s PC group represented 57% of its first-quarter revenue. This is clearly Intel’s most important segment, but its revenue declined by 8% year over year. In response to sluggish PC sales, Intel invested heavily to build its mobile chip business.
To a certain extent, Intel succeeded in its efforts. Intel shipped 46 million tablets just last year. Unfortunately, Intel’s mobile business is losing a lot of money.
Losses in Mobile
In order to capture these sales, Intel had to offer device makers significant subsidies. This resulted in “contra revenue,” which produced massive losses. Intel lost $4.2 billion in mobile last year, up 35% from a $3.1 billion loss in 2013.
The good news is that Intel management acknowledges this challenge, and has vowed to turn Intel profitable in mobile. The company is targeting $800 million in increased mobile profits this year. If Intel succeeds and reaches its goal, it will be an important first step in curing what ails its mobile business.
Intel’s nearly 3% yield is certainly attractive for those who want investment income. With interest rates still very low, yield is hard to find. That makes Intel a good choice for dividend investors.
But Intel may not be able to increase its dividend at high rates over the next few years, unless PC shipments grow once again or Intel’s mobile unit drastically improves profitability.
Apple’s most closely guarded secret
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