This is a tough article to write. I don’t like to sell stocks too often. I look at each stock in my portfolio as valuable branches to my dividend growth tree, ultimately providing me bountiful dividends with which to pay my expenses. Every time I cut a branch from my tree, my tree produces less dividends. However, if it’s the occasional pruning to make the tree stronger and better over the long haul, then it is a chore I must perform and ultimately will be better off for it.
This is now the seventh sale transaction since I went live with Dividend Mantra back in early 2011. Not bad for a three year period, especially seeing as how I’ve published 61 purchase transactions in this same time period. However, as long-term buy-and-monitor investor I try to keep sales to a minimum, and would prefer to never have to sell. Alas, companies are organic and they do change, and as such I have to respond to these changes in a manner that best befits me and my wealth.
This is the last of my position in Intel, so as such I have closed this position out and am no longer invested with the company. I talked at great length about Intel when I decided to first sell off a portion of my stake in the company back in September of last year. I probably could have just sold off the entire position back then, but I wanted to see what early 2014 would bring and see how the fourth quarter played out, which would close out Intel’s 2013 financial results.
Well, the company reported 4Q 2013 results after the bell on January 16, and with that we have a clear view of where the company went in 2013. Revenue was off -1% vs. 2012, EPS was down -11%, net income down -13% and gross margins were also showing a negative trend. However, while the fundamentals are eroding a touch and this might not bode well for the future, this isn’t why I sold. In fact, with a P/E ratio of 13, a yield of 3.6%, a payout ratio under 50%, robust cash flow, big margins and a healthy ROE the company is rather solid quantitatively-speaking and the valuation looks good. If this were another company I might actually be a buyer, but unfortunately it’s not a different company and I’ll discuss my reasoning for the sale below.
On Thursday, January 23 Intel declared a dividend of $0.225 per share. This is now the seventh quarter in a row with the same dividend. And I had to draw a line in the sand.
I’m a dividend growth investor, not a dividend constant investor. I invest in companies that predictably, and reliably, raise their dividend on an annual basis, and furthermore have a reasonably good chance at continuing to do so for the visible future. Intel did not raise its dividend in 2013, and by starting off 2014 with the same payout this was my cue to exit stage left.
I’ve talked at length lately about not just focusing on the quantitative fundamentals of a company, but instead also taking a good, hard look at the qualitative aspects of a company. I’ve been reading through Intel’s press releases and looking at investor presentations in order to figure out if they have what it takes to be a dominant force in computing for the next decade or more. Obviously, there is a fundamental shift in computing right now and the trend points to more and more people computing on mobile devices. Intel has long been a juggernaut in the PC world, but hasn’t shown an ability to be a leader in mobile processors. And when I tried to figure out whether Intel can compete and grow I had more questions than answers.
Intel CEO Brian Krzanich revealed during the earnings call that Intel plans to grow tablet volumes to 40 million units this year. That would be a fourfold improvement on where they ended in 2013, and it’s unclear whether they’ll be able to reach this goal. It appears that the company plans to buy their way into the market by way of contra revenue – paying tablet makers to cover the additional costs of using Intel’s chips (integrating additional components due to loss of functionality in using Intel’s SOCs) as well as helping to cover some of the costs of designing tablets that can use Intel’s products. This seems like a valid strategy because they’re so late to the party; Intel needs to be aggressive here. However, this will mean further drags on revenue with an unclear view on whether this will lead to long-term gains in mobile. They’ll have more units sold, but at what costs? Furthermore, there is also no clear view on improvements in smartphone chip market share as Intel is right now aggressively focusing on growth in the tablet segment.
Look, I’m no chip expert; I’m not an engineer. But when a company as big as Intel makes a serious push into something and offers to buy its way in I like their chances. However, I’m also no gambler. As a dividend growth investor I expect to be paid to wait while business improves, and I also expect that the piece of the profit pie that I’m receiving as an investor to grow so as to protect my purchasing power. And right now Intel is not delivering, which is a shame because the company has the cash flow to increase the dividend. The payout ratio on earnings is only 47% and FCF covers the dividend more than twice over. And it’s exactly because of the fact that the company has the ability to increase the dividend but insists on not doing so that I sold out of Intel to put my money to work with companies that like to reward business partners with growing payouts.
My cost basis on the 100 shares was $2,097.47 for a cost basis of $20.97 per share. I also received $96.75 in dividends from these 100 shares during my tenure of part-ownership in the company. That means my total return on the shares was 23.8%. Not bad considering all of the negative press Intel has gotten over the last few years and the fact that they didn’t raise the dividend. I’m actually a little relieved to exit the position profitably as I’m not all that keen on the tech sector as a whole, to be honest.
In conclusion, maybe Intel makes in-roads into mobile, and maybe they don’t. However, the company’s decision to not raise the dividend shows a lack of faith as well as a lack of respect for the investors. In light of that, I’ve chosen to invest elsewhere. I’ve already put the funds from the Intel to sale to work, as I decided to add some fresh capital from my day job with the funds from this sale and invested the combined sources of cash into two separate companies. I’ll be discussing those transactions over the coming days, so stay tuned!
This sale reduced my annual dividend income by $90.00.
Full Disclosure: None
How about you? Still invested in Intel? Think they’ll raise the dividend later this year? Did I make the right choice?
Thanks for reading.
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Edit: Added in dividend income loss to reflect reduced income from sale.