In addition to posting posting our portfolio and the income we receive from it, I'm going to also post my reasoning for purchasing these companies. Overall, investing is about buying companies that add value to your portfolio. These assets should pay you back in a higher share price, dividends or both. My main focus is on receiving dividend payments so that I can reinvest those dividends by buying more companies. I think that if my strategy was to simply trade stocks based on price fluctuations, I'd be a poor steward of my finances. I'd pay commission fees in what is essentially gambling on hot stock tips. I'd much rather think like a business owner, and invest for the long term. I do speculate sometimes, but not in a way that would risk my family's ability to give or pay our expenses. Our goal is to create a portfolio of assets that generate income, so that we can use that income to bless others. Let's look at how INTC accomplishes that.
Intel (INTC) is a company that designs and manufactures advanced integrated technology platforms. These platforms include microprocessors and chipsets that may be enhanced with additional hardware, software and services. Intel is the microprocessor of choice for Microsoft(MSFT) and Apple(AAPL) computers, and is making headway into the tablet and smartphone markets.
What matters most: Cash money
Before we talk about the company's cash holdings and ratios, I think it's important to talk about its debt. INTC currently has $13.1 billion in debt on its balance sheet. Of this, $281 million is currently due. INTC has a cash cushion of $3.1 billion, and current assets totaling $27.9 billion. INTC's current liabilities total $13.8 billion, giving INTC a current ratio of 2 and a quick ratio of 1.4, meaning INTC has more than enough cash, and assets that can quickly be converted to cash, in order to cover it's current liabilities. If the business somehow takes a turn for the worst, they would still have enough to cover both their current liabilities and even completely eliminate their debt. INTC is also generating healthy cash flow from operations, to the tune of $20.7 billion, resulting in $1.83 in free cash flow per share. I usually like to invest in companies with a P/FCF of 15 or below. INTC's current P/FCF is 17, which is slightly higher than I would normally pay, but I think the company can grow its free cash flow as it continues to grow its mobile microprocessor market share.
Dividends - The privilege of ownership
I like to invest in companies that pay a dividend in order to reduce my risk, earn a return on my capital invested, and reinvest those dividend payments into a snowball of dividend checks. INTC has been increasing its quarterly dividend since 1992, and currently pays $.225 a quarter or $.90 a year. That comes out to a 2.8% dividend yield, and most likely to continue growing. INTC's payout ratio, when compared to earnings, is 42.8% and 49% when compared with free cash flow. INTC has the cash cushion to pay a higher dividend, and the free cash flow to increase it. I like to do some calculations to see how long it would take one share of a company's dividend payments to equal another share, if prices remained the same and dividend payments were held for the sole purpose of buying one more share, with no compounding. It would take 35.7 years for one share to become two INTC shares with the current level of dividend payments. I also like to calculate how many shares an investor would need to buy now in order to generate the equivalent of one share in dividend payments a year, all else being equal. It's interesting to note that, if an investor wanted to generate the cash in dividend payments for one share this year, it is equal to the amount of time it would take for one share to double from its dividend yield. Buying 35.7 shares would result in an extra share at the end of the year, generated by passive dividend income.
Book Value - Real Company Value
I personally like to invest in companies with a P/B ratio of 2 or less, and in some cases I'll invest in companies with a higher P/B if the income stream of dividends is worth paying more for it. INTC currently has a P/B ratio of 2.6. I'm willing to pay a little more because of it's strong cash position and overall balance sheet.
Income - How well a company is managed
I normally don't like to rely on the income statement as a measure of value. I do think it offers the best glimpse of how well a company is able to manage its expenses while generating revenue, but I'll rely more on the cash flow statement to find value. INTC did report higher revenue and earnings this past quarter, but the price was dragged down in the overall market. INTC currently has a P/E ratio of 15.5, while most "fairly valued" companies PE's range from 15 to 25. Honestly I don't care too much about P/E ratios, but it can help me gauge whether or not I can pass up on a company that is priced too high, and look for other companies. According to it's P/E ratio, INTC would be considered to be a bit of a bargain.
Using Guru's DCF calculator and inputting FCF of $1.83 we get a valuation of $24.98 a share, and $33.8 a share after adding tangible book value. Since the company has so much property it's import to consider their tangible book value per share. The company isn't cheap when looking at its P/FCF, and P/B ratios. An investor would have to seriously consider their investment philosophy and see whether investing in this business coincides with their philosophy.
Why I’m investing in INTC
I'm investing in INTC because I have a very long investing horizon of at least 40 years. INTC is the leading microchip provider in an economy that relies on computers for almost everything. This trend does not seem like it would be reversing, and as tablets and mobile devices lead technological advances, INTC will provide products for this industry as well. I don't need to necessarily have every single technological company in my portfolio; I can just have the company that services all of them. My philosphy is to invest in companies that pay a dividend so that I can reinvest those dividends and buy more companies. INTC is a business that helps me do that.
Disclosure: Long INTC