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Mon. Oct. 13, 2008

Stock Analysis: Intel Corporation (INTC) Attractively Priced *

This article originally appeared on The DIV-Net October 6, 2008.

Linked here is a PDF copy of my analysis of Intel Corporation (INTC). Below are some highlights from the above linked analysis:

Company Description: Intel Corporation engages in the manufacture and sale of semiconductor chips, as well as in the development of advanced integrated digital technology platforms for the computing and communications industries worldwide.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number

INTC is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, INTC is trading at a 18.4% discount. INTC earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.

INTC earned two Stars in this section for 1.) and 2.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. INTC has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for 5 consecutive years. Last year’s dividend payout was 38%, up from 47% in 2006. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of one Star in this section.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

  1. NPV MMA Diff.
  2. Years to >MMA

INTC earned one Star in this section for 1.) above. The NPV MMA Diff. of the $32,322 is in excess of the $10,000 minimum I look for in a stock that has increased dividends as long as INTC has. If INTC grows its dividend at 17.0% per year, it will take 5 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: INTC is a member of the S&P 500. INTC’s results reflect the cyclical nature of the semiconductor industry and demand trends for personal computers. Historically, INTC shares have experienced high share price volatility. The company has a strong balance sheet including low debt levels compared to peers. In the future, INTC has the opportunity to realize marketshare gains and margin expansion. Future growth is available from new offerings, such as its Atom processor and planned graphics processor unit.

Conclusion: INTC earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net+ total of three Stars. This quantitatively ranks INTC as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $26.74 before INTC’s NPV MMA Diff. decreases to the $10,000 NPV MMA Diff. that I like to see. At that price INTC would yield 2.05%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $10,000 NPV MMA Differential I’m looking for, the calculated rate is 12.9%. This dividend growth rate is well below the 17.0% used in this analysis, thus providing a good margin of safety.

I last reviewed INTC on 1/29/2008. At that time, it was yielding 2.47%, trading at $20 and was ranked as a 1 Star-Weak stock. Now with a 3% yield, INTC seems to be attractively priced at $17.31. I would be very comfortable initiating a position in INTC below $21.21.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in INTC. However, subsequent to the original post on The DIV-Net, I initiated a position in INTC. (1.2% of my Income Portfolio) .

What are your thoughts on INTC?


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