Unfortunately, the board of directors decided to pay out 22.5¢ per share, again! That's eleven quarters without a dividend raise. Effectively, as far as dividend growth investors are concerned, INTC froze its dividend:
2012
|
2013
|
2014
|
| Mar • Jun • Sep • Dec | Mar • Jun • Sep • Dec | Mar • Jun • Sep • Dec |
| 21.0¢ • 21.0¢ • 22.5¢ • 22.5¢ | 22.5¢ • 22.5¢ • 22.5¢ • 22.5¢ | 22.5¢ • 22.5¢ • 22.5¢ • 22.5¢ |
87¢
|
90¢
|
90¢
|
When I started DivGro in January 2013, I wrote down several rejection criteria to help me determine when to sell shares of underperforming stocks. One of those criteria related to dividend payments:
• Dividend is suspended, cut or frozenSo, the question is: why am I not selling my INTC shares after the company froze its dividend?
Total Return
INTC was my second purchase for DivGro after Chevron Corporation (CVX). I bought 120 shares on January 8, 2013. In the 620 days that I've owned INTC, the share price has increased an impressive 64%, or 38% annualized:
During this time, I've received $189 in dividends, which represents a payback on my initial investment of 7.4%. The total return on my initial investment of $2,546 is therefore $1,822, or 72%.
I think there are other reasons not to sell INTC now. Although the company has struggled because of PC sales declines and a weak mobile presence, it is still generating strong free cash flow. It has a strong debt to capital position (only 19%) and is aggressively deploying capital to gain a larger share of the mobile market, where future growth will occur.
INTC announced a new $20 billion share buyback program earlier this year and suggested that it would accelerate the buyback during the rest of 2014. Stock buybacks benefit shareholders indirectly, as each outstanding share ends up being a little bit more valuable. I would prefer to receive growing dividends, though, if given the choice. For the time-being, it looks like INTC wants to bring its dividend payout target back down towards 40% before increasing the dividend again. To do so, free cash flow needs to improve and the share buyback would help by bringing the share count down.
This article suggests that INTC's stock price could increase by 36% to $45 by end-of-year 2016. It is a cautious view, given the author's expectation of a correction in the stock market in the coming months. A much more optimistic view proposes that INTC could double its share price in the next 2 years. Based on an assessment of INTC's strategy under the leadership of CEO Brian Krzanich, the author believes the company is positioning itself rapidly to be the major supplier for data centers, tablets with detachable keyboards, and so-called Internet of Things (IoT) devices.
Yield on Cost
Since I bought my shares of INTC at $21.21 per share and INTC (still) pays 22.5¢ per share, my yield on cost (YoC) is 4.24%. That is a solid yield! Buyers today will only get 2.58%:
INTC is ranked 14th of the 34 stocks in DivGro by YoC. For comparison, DivGro's average YoC currently is 5.02%:
If I were to sell INTC now, what would I replace it with? This year, one of my goals is to diversify DivGro's holdings across all 10 sectors in my watch list. By Selling INTC, I would need to find an appropriate replacement in the Information Technology sector. Not a single candidate in my watch list in that sector yields more than 4%!
Of course, I could replace INTC with a higher yielding stock from another sector, such as BCE Inc. (BCE). Winner in the Telecommunication Services sector in my recent rankings of watch list candidates, BCE currently yields an impressive 5.21% @ $47.38. However, that would make DivGro overweight in the Telecommunication Services sector and I would have to fund an Information Technology sector purchase with new funds.
INTC is ranked 14th of the 34 stocks in DivGro by YoC. For comparison, DivGro's average YoC currently is 5.02%:
If I were to sell INTC now, what would I replace it with? This year, one of my goals is to diversify DivGro's holdings across all 10 sectors in my watch list. By Selling INTC, I would need to find an appropriate replacement in the Information Technology sector. Not a single candidate in my watch list in that sector yields more than 4%!
Of course, I could replace INTC with a higher yielding stock from another sector, such as BCE Inc. (BCE). Winner in the Telecommunication Services sector in my recent rankings of watch list candidates, BCE currently yields an impressive 5.21% @ $47.38. However, that would make DivGro overweight in the Telecommunication Services sector and I would have to fund an Information Technology sector purchase with new funds.
Outlook
I think there are other reasons not to sell INTC now. Although the company has struggled because of PC sales declines and a weak mobile presence, it is still generating strong free cash flow. It has a strong debt to capital position (only 19%) and is aggressively deploying capital to gain a larger share of the mobile market, where future growth will occur.
INTC announced a new $20 billion share buyback program earlier this year and suggested that it would accelerate the buyback during the rest of 2014. Stock buybacks benefit shareholders indirectly, as each outstanding share ends up being a little bit more valuable. I would prefer to receive growing dividends, though, if given the choice. For the time-being, it looks like INTC wants to bring its dividend payout target back down towards 40% before increasing the dividend again. To do so, free cash flow needs to improve and the share buyback would help by bringing the share count down.
This article suggests that INTC's stock price could increase by 36% to $45 by end-of-year 2016. It is a cautious view, given the author's expectation of a correction in the stock market in the coming months. A much more optimistic view proposes that INTC could double its share price in the next 2 years. Based on an assessment of INTC's strategy under the leadership of CEO Brian Krzanich, the author believes the company is positioning itself rapidly to be the major supplier for data centers, tablets with detachable keyboards, and so-called Internet of Things (IoT) devices.
Conclusion
Although INTC has frozen its dividend, I'm not selling my shares. I bought 120 shares at a YoC of 4.24%, which would be difficult to match without impacting DivGro's sector diversification in a negative way. INTC has delivered a total return of 72% on my initial investment and I believe it will continue to outpace the broader market in the next few years. I'm hoping to see the company resume its dividend increases in the next year or so.
If INTC fails to grow as expected or it decides to cut or suspend its dividend, I'll sell my shares.
Do you own INTC? Are you thinking about selling your shares due to the dividend freeze? Or have you already sold your shares? Feel free to comment below.
I really like how you put this together. IMO being over weight in one sector wont really matter now because you have a lot of years of investing, but I like you points. Good luck to you with your decision.
ReplyDeleteAlso, Where do you get that dividend yield chart? I like the one you use. I use ychart for the history dividend yield.
Thanks, FFdividend! I'm already overweight in several sectors -- my goal for the year is to diversify as far as possible, so I'm always considering the sector I'm investing in. But I'm not pedantic about it...
DeleteI cobbled together the dividend yield chart from data and a graphing facility available at dividend.com. I'm a subscriber. The overlay is from Photoshop.
Cheers
FerdiS!
It is funny that you wrote this post, because just the other day I was wondering about your continued holding of INTC. I like how you've laid our your thinking, and it makes sense for sure. Last summer, August I believe, I sold my position after seeing the lack of dividend increase. For me, it didn't make sense, but that is why investing and blogging is such a learning experience, as each one of us can read about the rational behind other's actions or inactions.
ReplyDeleteYes -- it took me some time to process INTC's dividend freeze. I had to consider carefully the intent and meaning of my rejection criteria... so far, I've been accumulating and not really paying too much attention to "discarding" shares.
DeleteI guess I'm less pedantic than others are about applying "criteria". To me, a dividend freeze does not necessarily translate into "sell shares!". Similarly, having "dividend yield exceeds 2.75%" in my selection criteria doesn't mean I won't buy shares in a company yielding less.
I continue to hold ETP, PNNT, and NTT in DivGro. ETP froze its dividend before I bought my shares and have since unfrozen it. PNNT froze its dividend after I bought it, but I kept my shares for the excellent yield. NTT continues to raise its dividend, but in foreign currency. In dollar terms, it has gone down. I don't feel I should sell because of currency exchange issues.
I appreciate your comment -- and would appreciate it also if you would challenge my thinking (or action or inaction!) when it doesn't make sense to you!
Cheers
FerdiS
Hi DivGro,
ReplyDeleteI think it's a wise decision to hold on INTC. While they did not keep the streak going, it looks like it's not in their interest. It's a matter of company policy and interests I would say, but they have a long track record of providing good shareholder returns.
Best,
Dividend Venture
Thanks, DividendVenture! Yes, based on what I read in terms of INTC's recent dividend freeze, I never got the idea that INTC is uncertain about its future. In fact, I get the impression that INTC is a company on a mission... For the time-being, I'd like to accompany them on this mission!
DeleteThanks for sharing your thoughts on INTC. I'm one of the many who sold it this year for lack of an increase. With the proceeds I bought Pepsi, Chevron and McDonalds. This leaves me light in the tech sector with AT&T as my only tech holding but I have my eyes peeled. I really wish I would have held Intel a bit longer just because I would have made an even larger capital gain from the sale but nobody can predict the future, certainly not me. Keep us posted on what your do with Intel in the future.
ReplyDeleteThanks,
CD
Hi CD -- you're right -- no one can predict the future, so who knows whether I'm going to be happy or regretful that I'm hanging onto my INTC shares. I just have a feeling that INTC is going places and that it will resume raising their dividends some time in the future. I'll be the first to admit that my approach is probably not "pure" dividend growth thinking, but that's OK by me. As I mentioned in another comment above, ETP resumed its dividend hikes after having frozen it for a while, and I can't be happier with its performance now!
DeleteI don't own Pepsi, but those three are great replacement stocks -- can't go wrong, there!
While I'm on board with dividend growth investing, it seems to me that there are many possible variants of it. I feel like the DGI community as a whole is slowly beginning to box itself into only one particular variant -- active over passive, individual stocks over funds, and above all, the expectation that companies must increase the dividend every single year. I don't think that's particularly helpful.
ReplyDeleteRequiring that dividend increases conform to a one year calendar is really a type of short term thinking. Many companies have rather cyclical or lumpy earnings and cash flows, and while most investors understand that, we often still want the dividend increases to proceed like clockwork at 6% each year. Yet in many cases, that approach is not in the best long-term interests of the company.
The best advice for an individual investor with any investing style is to take a long term view. A yearly dividend increase is nice, but to me, the more important question is not whether the dividend will be increased 6% next year, but whether it will be significantly higher 5 years down the road.
Well stated! I've often wondered about the practice of having quarterly reports and what impact it may have on thinking and planning. Arbitrarily using a calendar year to check if dividends are being increased seems similarly short term oriented.
DeleteAs I mentioned above, I'm probably not a "pure" DG investor, but, as you suggest, practice a variant of it. For me, investing in a company means a longterm commitment and includes trying to understand the decisions made by the board of directors, even if, on the surface, they don't live up to my expectations as a DG investor.
Considering a DG portfolio of 36-42 holdings (my target), I'm comfortable including a handful of stocks with high yields and no or low growth, or stocks that temporarily suspend increases in order to chase growth opportunities.
You make an interesting argument. If I were in your shoes, I'd probably make the same choice as you. But conversely, I wouldn't be adding to my position because of the lack of increase.
ReplyDeleteHi DividendDeveloper -- indeed, I wouldn't purchase shares of INTC at this level. Apart from the dividend freeze, I prefer yields above 2.75% and at the current price, INTC is paying only 2.58%.
DeleteThanks for stopping by!