Today I bought shares of Intel (INTC), the world's largest semiconductor chip maker. This is my third purchase of INTC this year, with previous purchases occurring in September and October.
The stock has declined recently due to concerns about earnings, PC sales, mobile market penetration, and the CEO stepping down. I think Mr. Market has overreacted to these issues, focusing too much on the short term and ignoring the company's long-term potential. Samir Patel recently wrote an excellent article on Intel at Seeking Alpha that provides a comprehensive look at the company and its prospects.
I continue to think that INTC is undervalued, with a P/E of 8.5 (its 5-year average P/E is 17.1), P/S of 1.8, and PEG of 0.8. I have seen a wide range of fair value estimates, but even the lowest values (such as $22.50 from S&P) give a margin of safety of at least 10%. The current dividend yield of 4.6% is well above historic levels and provides a nice reward for patient investors as they await a better appraisal of the stock by the market.
I bought 75 shares of INTC at the price of $19.56 per share, giving me a total of 190 shares at an average price of $21.17 per share and a 4.23% yield on cost. My previous cost basis was $22.22 per share, so this purchase reduced it by 4.7%, which is a nice example of averaging down. At the current dividend rate, I can expect to receive quarterly dividends from INTC of $42.75, which is $16.87 more than before this purchase. INTC will now contribute a total of $171.00 to my annual dividend income, which is $67.48 more than before. This purchase makes INTC the fourth-largest position in my portfolio, with a weight by market value of 5.8%.
This also happens to be my last purchase for 2012. It used up a good portion of my November savings and I have insufficient cash for another purchase. Now I can sit back and watch how the market reacts to the ongoing "fiscal cliff" issue as the year draws to a close. Actually, I probably will not be following the market too closely over the next few weeks due to my heavy travel schedule. I returned a few days ago from a work-related trip and tomorrow I leave for yet another one. I wanted to squeeze this post in before I go, though my monthly review for November will have to wait until the end of this week. As mentioned before, updates to my blog (and comments on other blogs) will likely be sporadic for a while.
Nice buy! Wow, I can't believe Intel's P/E has dropped to as low as 8.5. I'm considering making one purchase this month, and may consider INTC again. I'm still waiting for the market to drop some more, but there probably needs to be another panic event to trigger it.
ReplyDeleteHappy holidays!
FI Fighter: Thanks! Given how much INTC has fallen, I couldn't pass up this great opportunity.
DeleteDGM,
ReplyDeleteThanks for giving us the update.
I just read that SA instablog post. Wow! That was a heck of an article. I think I just spent about 30 minutes on it to really read through it.
He makes a great case for it, and may have just talked me into buying a little more. The comparison of INTC as a "bond earning 4.5%" to treasuries is pretty bang bang. The server/cloud businesses will continue to expand due to increasing mobility, so the tablet usage isn't all bad to INTC.
I suppose worst-case scenario, it's still not a bad investment here, but not great. If they can just make even small inroads into mobile it could be a blockbuster play. The only reason I haven't purchased more myself (as I agree it's cheap) is due to its weighting in my portfolio. I may, however, buy a little more and then hold for the long-term at that point.
I was hoping Windows 8 would be a bigger hit, but it seems not to be from everything I'm seeing. The old heydays of Wintel are probably over, but I still think INTC has a very solid business and I think the new CEO change could be really fantastic for this company. I think a new perspective could really freshen things up and I actually look at that as a positive.
Best wishes!
Dividend Mantra: Yes, that was a great article, and it was a contributing factor in my decision to increase my INTC position. I'm happy to collect a nice dividend while the market pushes the stock around.
DeleteHi DGM,
ReplyDeleteI like this purchase. I share your feeling that INTC shares are undervalued. I'll have to check out that new article. I have a put that I've sold in Dec. that will probably get executed and will make Intel my largest holding. I'm not too concerned as I am still building and it won't stay the largest portfolio weight.
Have a safe and happy holidays!
All About Interest: Thanks! I agree with your view on portfolio weight -- given that we're aggressively building our portfolios, there is not much need to be concerned about having one or two relatively large positions at the moment. In a year's time, it is likely that those weights will be reduced simply by purchases of other stocks.
DeleteI've been trying to figure out when I wanted to pick up some more and how I wanted to go about it, whether selling puts or buying outright. The biggest holdup right now is the weighting in my portfolio, I've got a pretty big chunk invested in INTC right now but it's very undervalued, especially if they can make just a little headway into tablets/smartphones.
ReplyDeletePassive Income Pursuit: I've also struggled with the decision of when to buy certain stocks. In this case, I couldn't resist buying INTC for under $20.
DeleteINTC looks nicely valued and has a good current dividend yield. I've looked at them before but when looking over the earnings I feel there is alot of fluctuation between the years. I typically like to see earnings consistently on an uptrend. Looks like they've been doing alright since 2008 though and could be worth another look. Good luck with your investment!
ReplyDeleteDividend Growth Stocks: Thanks for stopping by. INTC does have some earnings fluctuations, and their recent operating results haven't been stellar, but I think the market has baked in a pessimistic view of the company's future. An uptick in earnings could go a long way toward getting the market to value the company more favorably.
DeleteI don't currently have an INTC position but I'm pretty bullish on the company.
ReplyDeleteAt this valuation, if the company manages its cash well, it could give shareholders a low double digit return even without any growth, at all, perpetually through only dividends and buybacks. Any growth would be a bonus.
So all INTC has to do to be a decent investment going forward is to not shrink. I think the evidence leads to mild growth, so it appears to be a good buy.
Dividend Monk: Thanks, I appreciate and agree with your perspective.
DeleteDividend stocks with very high yields can seem tempting. But a little caution should be used before buying shares in these companies. High yields or very high yields can be a sign of weakness financial weakness that is' if the fundamentals of a company are not solid than avoiding stocks that pay large dividends is in order.
ReplyDeletePenny Stock Blog: Thanks for your comment. My purchase of INTC reflects a combination of its yield, dividend growth history, undervaluation, and my assessment of the company's prospects. I don't chase yield, but I am happy to buy a stock with a good yield if it represents a solid long-term investment based on several considerations, some of which I have described in my posts about INTC.
DeleteNice add-on with a great price. All Intel needs is good management making the right decisions and our investment will perform well. I hope Intel can keep the dividend growth above 6% per year over the next 20 years.
ReplyDeleteAverage Dividend Yield: Thanks! If INTC keeps growing its dividend for the next 20 years, I will be a very happy shareholder.
DeleteGood buy DGM. I've picked up a few shares over the past couple of months as well. I will add more if it pulls back more. I think there might be an opportunity right around the corner...
ReplyDeleteStoic: Thanks for your comment. It has certainly been an opportune time to build up a position in INTC.
DeleteDGM, Just be a little cautious here on Intel. I think this has the potential makings of a value trap. The PC market is in slow and steady decline, and from a processor perspective, mobile and tablet sales will drive growth. Qualcom (in particular) and Nvidia have generational improvements on Intel from a mobile processor standpoint. It will take much development for Intel to bridge the gap. Windows devices are not meeting with much if any consumer mindshare. Transforming into a services/cloud business has a lot of integration risk for the company (they likely need new acquisitions to get there). Just watch that the dividend payout ratio doesn't balloon too much over the next few years. Best.
ReplyDeleteIntegrator: Thanks for the word of caution. I have read several articles that express either bullish or bearish views on Intel. I find the bullish case more compelling, but I do admit that Intel is one of the riskier stocks in my portfolio. At this point I do not plan to increase my position further. I will continue to monitor the company and see how their business does in 2013. If it looks like a value trap, then I would reconsider my investment.
DeleteHi DGM, You might have already seen the latest div from INTC as flat no increases ? Time to exit ? Or given the yield might have a reason to hold for turn around and reinvest for the time being.
ReplyDeleteDiv Investor: I did indeed see the latest dividend declaration and I confess that I was a bit disappointed by it. I am aware that many dividend growth investors are closing their INTC positions now. However, I guess I'm more patient and/or optimistic about Intel's future because I will continue to hold my position.
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