It wasn’t that long ago that tech companies didn’t pay dividends. They plowed all of their cash into growth. Today, some of the more mature tech companies offer solid dividend yields.
Intel (Nasdaq: INTC) is one of those companies. It currently pays a 2.5% yield, though it was much higher last year when the stock was in the low- to mid-$20 range.
[ad#Google Adsense 336×280-IA]Last week, Intel reported fourth quarter results that beat expectations, but the stock sold off on what was perceived as a revenue warning.
Management said first quarter revenue would be between $13.2 billion and $14.2 billion. The midpoint of $13.7 billion is slightly less than the $13.77 billion consensus.
That caused the stock to sell off.
But what about the dividend? How safe is that $0.225 per share quarterly payout? That’s what reader William wants to know.
I last wrote about Intel in August 2013. At the time, I said there was nothing to worry about. Let’s see if the same is true a year and a half later.
In 2014, the chip maker generated $20.4 billion in cash flow from operations and spent $9.9 billion in capital expenditures. That gives us free cash flow of $10.5 billion.
Free cash flow is the most conservative accounting of the cash flow that is generated from running the business. Notice that it is different from cash flow from operations, which accounts for only the day-to-day operations, not investments in plants, equipment or other ways to grow the business. By including capital expenditures, we get a clearer picture of how much money the company truly makes, after considering investments back into the business.
Intel paid out $4.4 billion in dividends in 2014. That gives us a payout ratio of just 42% of free cash flow, which is well below my 75% comfort threshold.
That suggests that, should times get tough, Intel has plenty of wiggle room to continue to pay the dividend.
In fact, with a payout ratio so low, I’m surprised it hasn’t raised the dividend, especially because the company had done so for nine years in a row before it stopped the annual hikes in 2013.
But the company has not cut the dividend since it began paying one in 1998.
Going forward, Intel’s free cash flow is expected to steadily rise from $10.5 billion this year to $12.9 billion in 2017.
With free cash flow projected to rise by about 7% per year over the next three years, a low payout ratio and a 16-year track record of never cutting (and often raising) the dividend, Intel’s dividend looks as solid as it was in 2013 when I gave it my top rating.
Dividend Safety Rating: A
— Marc Lichtenfeld
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Source: Wealthy Retirement