Dividend Investing | Technology

80% Buy Signal for Intel – Door is Open

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Intel is the world’s second largest and second highest valued semiconductor chip maker based on revenue after Samsung [1]
As I track my various dividend holdings, I am always looking for entry points.  Gotta spend that dry-powder every now and then, right?  I use a set of signals to help me decide what fair value for a dividend stock should be.  Intuitively,  if current price is below what I think fair value should be, it’s time to dig deeper.  When looking at Intel (INTC), certain signals suggest it’s time for me to consider buying again.

  • Intel is trading below fair market value.
  • Pro’s: Price, Payout Ratio, Sales Growth, P/E.
  • Con’s: Chowder (Yield + CAGR), EPS

Quick Conclusion

  • INTC
  • Consider Buying: $49.84
  • Fair Value:$52.46
  • Consider Selling: $62.96
  • Current Price: $45.42  <<< Hello!

Different Valuation Methods – Analysis Part 1

Using different data elements and ratios, I calculate or research what a fair price for the stock would be.  I then assign a weighting value to each method and come up with an aggregate fair price.

Dividend Yield Method:

  • Stock Price = Current Dividend / (Current Dividend Yield * (1 + 5-Year Dividend CAGR))
  • $1.20 / (2.6% * (1 + 4.4%)) = $43.72
  • Note: CAGR means Compound Annual Growth Rate.

P/E Method:

  • Stock Price = Future EPS * Current P/E
  • 4.23 * 16.40 = $69.73

PEG Method:

  • Stock Price = Current PEG Ratio * Current P/E
  • 1.20 * 16.40 = $19.68

Gordon Method:

  • Future Dividend Amount / (Historical Rate-of-Return – 5-Year Dividend CAGR)
  • $1.25 / (14% – 4.4%) = $13.01

Change in EPS and P/E Method:

  • (Change in EPS * Change in P/E) + Current Price
  • (1.46 * -6.1) + $45.42 = $36.51

Morningstar’s Fair Value:

  • $65.00
  • If you don’t have a subscription, you can find the value by using the resources of your local public library– many of which provide you with a link after logging in with your library card.

Professional Analyst Price Targets:

Aggregate Fair Value:

  • $52.46
  • This is the final stock price value I use to determine if the price is inline with, above, or below current market price. Instead of an average of all the values above, I just use separate weights for each measure when coming up with a final value.

Quality Signals – Analysis Part 2

Price is a large factor in my buy decision (shown in Part 1 above), but I also look at various other buy signals. I weight each signal, based on my opinion of what is most important to me, and come up with an aggregate buy score (0-100%).  The higher the score, the stronger the buy signal.  Anything above 60% warrants my consideration.

  • Price is at least 5% below fair market value (covered in Part 1 above) : YES
  • Dividend Payout Ratio <= 60 : YES
  • Dividend Yield + 5-Year Dividend CAGR (“Chowder” ratio) >= 12% : NO (it’s 7%)
  • 5-Year EPS CAGR Growth Rate >= 1% : YES (just barely)
  • 5-Year Sales Growth Rate >= 1% : YES
  • P/E <= 20 : YES

I add a weighting I have defined for each of these signals and then transform those binary values (yes or no) into a 0-100% scale.  0% = lowest possible buy signal, 100% = highest possible buy signal.

For INTC, this current comes out to 80%.

Conclusion

My Dividend Investing portfolio is slightly underweight on Technology stocks, so I have been looking to boost that.  Intel is currently trading at what I believe is well below fair market value.  Buy signals give it a score of 80% (indicates positive quality).  Both of these together indicate I should give strong consideration to buying more shares for my portfolio.  Obviously I will need to take into consideration non-financial topics, such as criticism of Intel’s current leadership, chip market saturation (demand issues), etc. (but that’s all for another article).

Article Sources:

[1] Pic: https://en.wikipedia.org/wiki/Intel

[2] https://www.marketwatch.com/investing/stock/intc/