Intel (INTC), a dividend growth stock ripe for the picking?

Tech stocks, especially some of the big cap names, are transitioning to becoming great dividend stocks, in particular great dividend growth stocks. I’ve written about this rising trend previously (here). Also, I wrote about MSFT in particular, here, when it was at $24, although I didn’t think it was cheap enough (it now trades at $28). And even two tech stocks, Intel and MSFT, made my Christmas Wish List (here). Now, its time to write about Intel (INTC) some more.

Intel reported Q4 2010 earnings last week and in short they were outstanding. 2010 will go down as Intel’s best year ever, from both a revenue and profit point of view. They even raised guidance and announced aggressive capex spending plans, usually a show of confidence and strength from the company. This chart from Credit Suisse shows how these results stand up to history.

Not too bad? As recently as Nov 2010 they raised their dividend by 14% to $0.72 annualized. Shares currently yield 3.4%. Even during the brutal recession of the last 3 yrs dividend increases have averaged 12%. On a dividend basis, shares have only been cheaper, yielded more, on 9 other times in Intel’s history. Most notably in the 2008/9 great recession. The following chart shows this in greater detail. The left axis on the chart is dividend yield and the right axis is total return.

The stock is currently priced for forward returns of 13.4% to 16.4% purely on a dividend plus dividend growth basis, assuming 10%-13% annual dividend growth going forward. Historically the stock has returned 18.6% annualized since July 1986. So, what gives? Why is the stock not valued higher? Many of the reasons I think are similar to MSFT. Investors fear that Intel has lost its dominance, particularly as the new emerging smartphone and tablet world continues to grow. Intel is not as hated as MSFT but similar fears of its decline have kept a lid on the stock price. In the last 10 years, even including dividends, the total return on Intel shares has been -1.95% per year, coming off its exorbitant peak in 2000. A similar story to most tech stocks.

Is Intel a value trap or a great dividend growth stock ripe for the picking? Personally, I think fears of its demise are way over blown. Intel’s financial results do not exhibit a company on a precipitous decline. Intel’s enormous manufacturing prowess is way underestimated. And I think its investor base is shifting from the traditional tech growth investor to more long term value and dividend investors. This transition will take time but ultimately I think share holders will be rewarded for initiating positions at these levels. Shares are conservatively worth $26 to $28 a share.

Personally. I’m holding out for $19 or less. With the overall stock market looking a bit toppy to me and the VIX index below 20 I think there will be an opportunity to pick up shares for less than $19. I’m also considering selling some cash secured puts on Intel and earning some nice yield while waiting for my target price. With MLPs and other conservative dividend plays price for 11-13% forward returns I’d like to have some more margin of safety before owning Intel.

Disclosure: no position in Intel