Intel (INTC): Is there a future for Dividend Growth?

Regarding revenues, Intel’s Q2 2012 results missed the $13.6B consensus estimate of analysts following the stock, but still managed to garner $13.5B in revenues. The number represents a 4.6% increase from last year’s Q2 results.

Taking a closer look at some of Intel’s numbers, with an operating margin of 29%, an ROI of 26%, and a ROA of 18%, the well known technology stock with a P/E ratio of only 11.1 is trading at a discount compared to the industry average of 15.

Without doubt, there is a potential upside to investing in the company. For example, from 2009 to 2011 alone, Intel’s revenues increased by 53%, driven by an increase in sales in the Asia-Pacific region. Although, more conservatively speaking, the compound annual growth rate for Intel from 2002 to 2011 comes out to about 8%, which isn’t a bad number per say for investors looking for steady growth and a nice dividend payout.

Back in May, Intel raised its dividend from 21 cents to 22.5 cents per share, which equates to an expected annual payment of 90 cents per share. The next payment to be made on September 1 is 7% higher than the previous quarter’s, and represents a 40% plus increase over payments two years ago. With a current payout ratio of about 35%, Intel definitely has room to increase dividends. A $1 dividend in the near future would not be anything out of the ordinary.

Being the largest chip manufacturer in the world, Intel has positioned itself well in the marketplace, and is recently making a push into the smartphone and tablets markets with its main competitor being ARM Holdings. Seeing how ARM processors currently dominate the smartphone and tablets markets, Intel will have some work to do in trying to take market share away from ARM.

For conservative investors, Intel’s move into the rapidly growing but competitive mobile market may raise concerns about whether the company will be able to maintain and grow its attractive dividend yield. Additionally, future prospects of the company’s position in the mobile market are unclear. For Intel to prevail over competitors like ARM Holdings and gain market share, the company must grasp technological lead. It’s recent deal for a 15% equity stake in ASML Holdings, without doubt will bring Intel closer to the lead. The investment will allow for higher gross margins as the semiconductor giant gains an edge over its competitors in terms of having smaller chips, higher frequencies, and more integrated features. Intel’s brand name in the PC world will hopefully also translate well into the mobile world.

Nonetheless, the semiconductor giant, as said before has positioned itself well. Seeing how the company serves industries ranging from computer, communications, industrial automation, electronic equipment, military and defense, with over 80% of sales coming from outside the U.S., the technology giant has positioned itself to serve just about anyone in the world.

Compared to its peers in the industry, Intel fares quite well. The industry’s average dividend yield comes out to about 2.5% versus Intel’s 3.4%. The 5-year average annual growth in EPS growth for Intel comes out to 40% versus an industry average of 36%. Moreover, the 5-year average annual growth in revenues for Intel comes out to be an astonishing 16% versus an industry average of only about 5.5%.

Intel core businesses are strong, but its entry and move into the mobile market, security software, and things like IPTV may pose concerns for investors with regards to Intel’s future. Based on the numbers and fundamentally speaking, Intel should be able to continue paying dividends at its current rate, but dividend growth will have to depend on how the company fares in its new markets.

Compare the dividends of all 30 stocks of the Dow Jones Industrial Average.