Intel (INTC) is one of the most-followed firms on Valuentum’s website, and for good reason: the company is a holding in the portfolio of the Best Ideas Newsletter and pays out a lofty 3.3% annualized dividend yield at present levels. For our new members, our best ideas are always included in the Best Ideas portfolio and Dividend Growth portfolio.
We first highlighted Intel in the August 2011 edition of our Best Ideas Newsletter and added shares to the portfolio in September 2011 at just under $20 each. Though a 50% move upward to its current price is noteworthy, Intel has also paid a nice ~3% annual dividend yield along the way. We attribute the recent acceleration in the firm’s price toward our fair value estimate to Intel’s combination of having both good valuation and good momentum characteristics coupled with a nice income stream. Intel can better be described as a Valu-entum stock.
On a fundamental level, Intel announced June 12 that it had raised its second-quarter and full-year revenue and gross margin expectations thanks to stronger than expected demand for business PCs. The chip giant now expects second-quarter revenue to be $13.7 billion, plus or minus $300 million, compared to the previous range of $13 billion, plus or minus $500 million. Raising and tightening the guidance range is always a positive, as it signals strong business performance and greater visibility. Intel also noted that it expects the mid-point of the gross margin range in the period to increase by one percentage point, to 64%, plus or minus a couple percentage points. Though it made a couple tweaks higher to its expected R&D plus MG&A spending expectations and its tax rate for the quarter, the increased top-line and gross margin expectations are well-received.
On a full-year basis, Intel will return to top-line expansion, versus its previous outlook calling for flat performance. The firm also noted that the strong second-quarter gross margin will favorably impact full-year performance, driving the measure to the high end of its yearly guidance range (61% +/- a few percentage points). Intel expects to provide a new full-year gross margin range when it reports second-quarter results July 15 (as it receives a few more data points regarding the sustainability of business PC demand for 2014). R&D plus MG&A spending and its tax rate will also be a bit higher than previous expectations for the year. However, the top-line and gross margin news are far more important as it relates to materiality.
All-in, our thesis on Intel heading into 2014 has played out almost exactly how we imagined, and we trust you have profited greatly. For our new members, here was our quick take from December 2013:
According to data released by the International Data Corporation (IDC) Worldwide Quarterly PC Tracker on December 2, personal computer shipments will drop more than 10% in 2013, the most severe yearly contraction on record. However, this news isn’t the key takeaway. Instead, it is expectations for stabilizing demand by 2015 that we expect to provide a shot of optimism to the PC supply chain. We view the news as particularly positive for Intel, offering further support for the long-term growth and sustainability of its dividend. We think shares of Intel are worth nearly $30 each.
We would expect other firms in the PC supply chain such as rival AMD (AMD), Dividend Growth portfolio holding Microsoft (MSFT), Hewlett-Packard (HPQ), and Nvidia (NVDA) to have an upward bias to near-term performance as a result of Intel’s news. We don’t expect to make any changes to our position in the chip giant’s shares in the Best Ideas portfolio at this time.