Pop quiz: Which two major players in the tech industry reported earnings this week that also happen to be serious dividend payers?
If you answered IBM (NYSE: IBM) and Intel (Nasdaq: INTC), then you’re right on the money.
Yes, earnings disappointed on both counts. But short-term performance glitches hardly mean that they’re out of the running as worthy dividend investments.
But will they stand up under scrutiny?
Let’s give the first crack to the longest payer of the two…
Paying Dividends Since Before You Wore Short Pants
By “longest” payer, I wasn’t kidding.
IBM has been around the dividend block and then some.
So far, it’s made 390 disbursements, stretching back to… wait for it… 1913.
Given that almost geological amount of time, you can bet that the program has had its ups and downs. Luckily, we can regard the bulk of that as ancient history and consider just the last decade or so instead.
So how have IBM’s dividends fared in the more recent past?
At the moment, IBM pays a dividend of $0.85, or $3.40 annualized, representing a projected yield of 1.69%. That’s about half a percentage point beneath the average yield of the S&P 500. Not the most impressive yield by a long shot, which begs the question: Is there anything to make such a puny yield worthwhile?
Short answer, “Yes. Dividend growth.”
Beyond the almost 100 years of paying a dividend – which basically screams dependability – IBM’s also proving lately that it means serious business when it comes to dividend growth. Case in point: It’s raised its dividends consecutively for the last 13 years. What’s more, a five-year average growth rate of 22% shows that the increases haven’t been mediocre, either.
The stock itself isn’t the greatest performer out there, but as a long-term dividend investment, it makes the grade. Year-to-date, it’s gained 10.44%. Compare that to gains of 31.88% industry wide and 18.21% for the S&P 500 over the same period.
Bottom line: Granted, the stock has a low yield and slightly underperforms. But when you’re looking for long-term dividend growth, the yield isn’t the primary consideration. Growth and dependability are.
In this case, IBM – a solid dividend grower with a history older than Methuselah – has both in spades.
When Your Chips Are Down
Intel doesn’t have nearly the dividend history of IBM, but it still has a substantial number of years under its belt.
It began paying dividends in 1992. And over the course of the subsequent 19 years, it hasn’t cut its dividend once. Even better, it’s in its eighth year of consecutive dividend increases. In other words, it’s paid its dues.
Times, unfortunately, have been tough for Intel. The reason being is that the semiconductor industry is undergoing a drastic shift away from PCs to mobile devices. And this race to mobile ubiquity has lit a fire under the likes of Advanced Micro Devices (NYSE: AMD), ARM (Nasdaq: ARMH), Texas Instruments (Nasdaq: TXN) and Intel. All of them want a piece of the microprocessor pie. But in an industry where network effects reign, in the words of the “Highlander,” “There can only be one.”
For this reason, Intel’s performance has been less than stellar. Over the last year, its sub-zero loss of 2.73% is markedly worse than the semiconductor industry’s gain of 2.79%, or 24.40% for the S&P 500 over the same period.
Nevertheless, Intel remains the dominant player in the PC market. (So much so that Morningstar calls its nearest competitor, AMD, an “also-ran.”) So even if Intel loses the race in the mobile wars, its long-term prospects remain fundamentally strong.
Intel currently pays a quarterly dividend of $0.224, or $0.90 annualized, representing a projected yield of 4.13%. That’s about twice the average yield of the S&P 500. But it doesn’t end with an attractive yield. The company’s been an aggressive grower, to boot, raising its dividend for the last five years by an average of 14.45%. And a low-end payout ratio of 32.7% means it can continue to do so.
The short-term headwinds that Intel is facing have an upside, as well.
The stock is currently trading at a discount at 9.2 times earnings. That’s miles below the industry average P/E of 17 and its own five-year average of 17.1.
Bottom line: Recent underperformance is no reason to disregard Intel as an otherwise attractive dividend stock. In the long term, Intel’s poised to maintain its PC dominance (with the possibility of gaining mobile prevalence) – and keep increasing its dividends along the way.
Source: Dividends and Income Daily