INTC is not a dividend achiever. It has been paying growing dividends for last 5 calendar years. The latest dividend increase was in February 2010. I had last reviewed INTC in July 2009. My objective here is to analyze INTC is a continuing to be a good dividend growth stock and how it will rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend chart  summary is shown in images below.

• Revenue: Overall the revenue growth as been flat for last 5 years.
• Cash Flows: In general, a range bound operating cash flow, which does not show increasing trend. The free cash flow is generally close to net income.
• EPS from continuing operation: In general, a range bound EPS from continuing operations. Overall, not an increasing trend.
• Dividends per share: Consistently growing dividends since 2003.

INTC : Trend Analysis

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.29. This is a medium risk category (very close to being high risk) as per my 3-point risk scale. The increased payout factor and erratic EPS makes it a medium risk-to-dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 14.8% (stdev. 9.2%) is more than average EPS growth rate of (3.8)% (stdev. 31%). Dividends have grown faster than earnings per share.
• Duration of dividend growth: 5 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10% for past 8 years. More than 10% for last five years.
• Payout factor: In the past 8 years, it has been in the range of 10% to 60%. Very wide range. It is now at 72% (at the end of 2009).
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 2.8%; and (b) MMA yield is 1.75%. Last 5 years average dividend growth rate has been 14.8%. I do not expect INTC dividend growth rate at 14.8%. With my projected dividend growth of 3.5%, the dividend cash flow is twice the MMA income at the price of $20.10.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $7.21
• Average high yield price calculated based on past 10 years: $23.8
• Pricing based on past 8 year relative price-to-earnings ratio. $23.6
• Pricing based on price-to-earnings ratio of 12: $13.6
• Graham number: $9.1

The range of fair value is calculated as $12.6 to $16.2.

Qualitative Analysis
INTC continues to remain un-challenged leader in the computing microprocessor market segment. Its sole challenger, AMD keeps raring its head every once in a while. However, it has not seen any sustained challenge. On occasions this makes the company complacent and ignoring what the markets wants.

• Like with any other technology company it is operates in a cyclical industry. Current recession seems to have had a significant impact. The recent 2010 Q1 results make us believe earnings are returning back.
• The company seems to have entered into stagnation phase where it already has majority of market share. It banks of expansion of market for growth.
• INTC is continuously searching for new growth areas with not much success so far.
• Lately, it has had few initiatives to go into newer market segments viz. the health care diagnostics products, MIDI devices using its low cost ATOM family of products, and embedded chips. Time will tell whether these two areas provide any growth to the company.
• The growth in dividends in last five years seems to be the result of historically low payout factor. This dividend growth does not seem to be as a result of the growth in EPS.

Conclusion

I like INTC technological driven supremacy in its product segment. It has been raising dividends for last five years only. This growth seems be due to historically low payout factor instead of growth in EPS. The stock’s current risk-to-dividend rating is 2.3 (medium risk). This is very close to my high risk point of 3.0. I will continue to hold my existing INTC stock in my dividend portfolio. However, I will only add if the price goes to lower end of my fair value range.

Full Disclosure: Long on INTC.

This article originally appeared on The DIV-Net on April 15, 2010

• USD 1.318 trillion on share buybacks;
• USD 1.276 trillion on capital expenditures;
• USD 0.376 trillion on research and development; and
• USD 0.605 trillion on common dividends.

To put these numbers in perspective, around that time period, the entire market capitalization of the S&P 500 was approximately $14 trillion. I was under the impression that corporate America spends more in research and development. However, this observation tells me otherwise.

The share buyback was the highest expenditure while dividend comes last. Dividends are approximately half in value than share buybacks. But isn’t share buybacks actually returning value to the shareholders? If that’s the case, why companies are not on buying binge in this market environment? The current environment provides the best buying opportunity for their stock. Shareholders need downward support “now”. Instead companies are saying they are persevering cash. Why didn’t the preserve cash when they had piles of them? The Standard and Poor’s research report made an interesting observation which is as follows:

Quoting from the report: “Traditionally, companies have used buybacks to offset the issuance of employee options, M&A activity, to temporarily support their stock and to reduce their share count. Over the past decade the option portion has accounted for the major use of repurchased shares and actual share reductions the least. Companies usually highlight and lump these expenditures, along with dividends, and present them as a return to investors of shareholder value.”

Majority of the buybacks is to offset the share count change due to exercise of options by the managements and employees. Typically, the majority of the options are held by management and executive teams, while employees’ have minuscule percentage. Buying back the stock provides support and helps keep prices at higher levels, so that management gets higher value for their options. This is an indirect way to pay themselves.

In addition, the reduction in share count helps increase the EPS quarter after quarter (assuming controlled buying through out the year). Here, let us look at PEP, INTC, and GE.

Pepsi: From 2003 to 2007, PEP spent USD 10.298 billion in share buybacks and USD 8.099 billion on dividends. During these 4 years dividends were consistently lower than buybacks. Now the conventional wisdom says the share count should have been reduced by now. The share count reduced from 1.705 billion (2003) to 1.605 billion (2007). This is only 100 million shares. So does USD 10.298 billion buy only 100 millions shares? The math says, USD 10.298 billion/0.1 billion shares, is approximately USD 100 per share. But during this period PEP never went near USD100 per share.

INTC: From 2003 to 2007, INTC spent USD 22.385 billion in share buybacks and USD 8.422 billion on dividends. During these 4 years dividends were consistently lower than buybacks. The share count reduced from 6.487 billion (2003) to 5.818 billion (2007). This is 669 million shares. So does USD 22.385 billion buy 669 millions shares? The math says, USD 22.385 billion/0.669billion shares, is approximately USD 33 per share. But during this period INTC was well under 33 (it was at 33 for brief period around Dec. 2004). Same observation is repeated.

GE: From 2005 to 2007, GE spent USD 25.717 billion in share buybacks and USD 31.264 billion on dividends. Important note is, during these 3 years dividends were consistently higher than buybacks. The share count reduced from 10.484 billion (2005) to 9.987 billion (2007). This is approximately 496 million shares. So does USD 25.717 billion buy 496 millions shares? The math says, USD 25.717 billion/0.496billion shares, is approximately USD 51 per share. But during this period GE was well under 51 (it was never at 51). Same observation is repeated.

It shows that PEP, INTC, GE just bought back shares to offset the options exercised by management and employees. This is an indirect way to transferring profits back in the pockets for management (and to lesser extent employees).

Summary is….
Above examples show that there seems to be a missing fine print which is not being communicated to the shareholders. It appears that managements are more intent towards balancing the options pricing needs (rather than shareholder interests). In these examples, I do not see value being returned to shareholders.

This post was originally published on The DIV-Net on September 10, 2009.

TIP Guy at TIPBlog.in presented his thoughts on how dividends are perceived at least in India’s corporate world. I am reproducing certain snippets (with author’s permission).

The lack of consistent dividend growth companies in emerging markets can be interpreted in different ways

1. Emerging economies need very dollar to invest back in their businesses. The cost of external capital is typically higher, and hence it is advisable to use internal resources. Shareholders can get their return by capital appreciation on their share values.
2. The managements are not mature enough to understand the importance of common shareholders, or sharing a piece of profits with shareholders, and/or prudent cash management over longer term.
3. The taxation policies which do not favor dividend distributions.

I believe most of the corporations in emerging markets are personality driven, and lack any institutional management philosophy. The corporations are primarily driven by personal aspirations (both, good and bad), and as a result the shareholders have miniscule holdings (and contributions). I cannot recall any instance where majority shareholders (other than family and friends) or banking institutions that have been able to make any change. And hence, this has a part in driving the dividend strategies. Common shareholders have such a small percentage holdings that they always remain in back burner.

There are approximately 400 companies in India that have at least paid dividends for last 10 years. However, they have not been growing consistently. Furthermore, the dividend strategies also hinge upon governments taxation policy and cost of available capital. I believe as that as Indian economy grows and competition increases, the cost of capital will come down, and taxation policy will evolve slowly towards friendlier dividends. As of today, at least the dividends are tax free for individuals.

Certainly, there are issues about Indian corporate’s dividend friendliness. However, there are 400 companies that still pay dividends. If we look back 30 or 40 years, I tend to believe that’s how US companies and corporate may have viewed the dividends. As US economy matured, few selected companies continued to follow their strategy resulting in Aristocrats’ and Achievers. While I tend to agree that, over time, Indian corporate may evolve towards dividend friendliness, I do not think it is at a point where they can be attractive on its own. There is promise, but not yet.

Until then I believe using US-based multinationals that generate revenue from emerging markets are best proxy for investing in emerging markets. Some examples are:

• QCOM (my analysis)
• BDK (my analysis)
• CBY (my analysis)
• INTC (my analysis)
• ADM (my analysis)
• PG
• UL/UN
• Nestle

What investment vehicles do you use for investing in emerging markets?

We can get a true picture by looking for consistency. Two simple statistical measures of average and standard deviation can help us measure consistency. A standard deviation that is narrow and lower than average is a good observation. The table below shows some examples of randomly selected financial metric for few companies.

Representative Financial Metric

• SYY is showing consistent performance with narrower standard deviations that are lower than averages.
• WMI has erratic revenue and EPS growth with variations more than averages. Indicating negative performances in past.
• QCOM has wide moat in its market domain and has consistency but its dividend growth is erratic.
• INTC is another example of wide moat in its market domain, with no competitor worth a mention. But its growth in dividends, revenue, and EPS is erratic.

For a given financial metric, when we compare the company’s current performance with historical averages (and standard deviation) is provides some insights into which direction the company is heading into. For example, decreasing operating margins and increasing payout factors are signs of trouble; highly varying metric with many ups and downs is also likely sign of trouble, etc.

I don’t like to get high. Companies that continue to strike balance in their year over year performances are the ones that provide long term sustainable returns.

This post was originally published on The DIV-Net on July 2,  2009.

This article originally appeared on The DIV-Net on June 11, 2009

Intel Corporation (INTC) designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in desktops, workstations, servers, embedded products, communications products, notebooks, netbooks, mobile Internet devices, and consumer electronics. It also offers chipsets with embedded designs for industrial equipments, point-of-sale systems, panel PCs, automotive information/entertainment systems, and medical equipment.

INTC is not a dividend achiever. It has been paying growing dividends for last 5 years. I had shortlisted INTC for more analysis in my list of potential for dividend growth investments and opportunities for technology dividends. Keeping with that, my objective here is to analyze if INTC is a good dividend growth stock and how it will rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 8 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

• Revenue: Consistently slow growing revenue since 2001. The average revenue growth for last 8 years is 3.5% (with 12.4% standard deviation). This indicating negative growth rates.
• Cash Flows: In general, a range bound operating cash flow. The free cash flow is generally close to net income.
• EPS from continuing operation: In general, a range bound EPS from continuing operations.
• Dividends per share: Consistently growing dividends since 2003.

INTC - Trends

INTC - Data Summary

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.3. This is a medium risk category as per my 3-point risk scale. The increased payout factor and erratic EPS makes it a medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 34.3% (stdev. 41.57%) is more than average EPS growth rate of 24.0% (stdev. 67.82%). Dividends have grown faster than earnings per share.
• Duration of dividend growth: 5 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10% for past 8 years. More than 10% for last five years.
• Payout factor: In the past 8 years, it has been in the range of 10% to 60%. Very wide range. It is now at 60%.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.5%; and (b) MMA yield is 3.4%. Last 8 years average dividend growth rate has been 34%. I do not expect INTC dividend growth rate at 34%. With my projected dividend growth of 3.5%, the dividend cash flow is equal to MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $6.2
• Average high yield price calculated based on past 10 years: $23.8
• Pricing based on past 8 year relative price-to-earnings ratio. $23.6
• Pricing based on price-to-earnings ratio of 12: $9.3
• Graham number: $10.4

The range of fair value is calculated as $10.5 to $14.7. This is determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).

Qualitative Analysis
INTC continues to remain un-challenged leader in the computing microprocessor market segment. Its sole challenger, AMD keeps raring its head every once in a while. However, it has not seen any sustained challenge. On occasions this makes the company complacent and ignoring what the markets wants.

• Like with any other technology company it is operates in a cyclical industry. Current recession seems to have had a significant impact.
• The company seems to have entered into stagnation phase where it already has majority of market share. It banks of expansion of market for growth.
• INTC is continuously searching for new growth areas with not much success so far.
• Lately, it has two initiatives to go into newer market segments viz. the health care products by tying up with GE and the MIDI devices using its low cost ATOM family of products. Time will tell whether these two areas provide any growth to the company.
• The growth in dividends in last five years seems to be the result of historically low payout factor. This dividend growth does not seem to be as a result of the growth in EPS.

Conclusion
I like INTC technological driven supremacy in its product segment. It has been raising dividends for last five years only. This growth seems be due to historically low payout factor instead of growth in EPS. The stock’s current risk-to-dividend rating is 2.3 (medium risk). I will continue to hold my existing INTC stock in my dividend portfolio. However, I will not be adding to my INTC position.

Full Disclosure: Long on INTC.