When the Chips Are Down

07/01/2010 10:54 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, recommends Intel as a long-term technology leader with a solid dividend.

The technology sector remains one of the more attractive areas for investment. One stock in the technology group that offers a lot to like right now is Intel (Nasdaq: INTC). I like the fact that the company is coming off three quarters of much-better-than expected earnings. I like the stock’s valuation at just 11 times the consensus 2010 earnings estimate of $1.87. That seems cheap to me given the expected profit growth for this year and next. I like the stock’s dividend yield of nearly 3%. I also like Intel’s direct-purchase plan, which permits any investor to buy the first share and every share of stock directly from the company. Investors who want a solid growth-and-income play in the technology sector at an affordable price should buy these shares now.

Intel is a leading manufacturer of integrated circuits used in computers and electronics. More than 80% of
sales come from overseas. Intel posted its best first quarter ever. Revenue rose 44% to $10.3 billion. Per-share profits rose from 11 cents in the year-earlier quarter to 43 cents, five cents better than the consensus estimate. The firm saw growing worldwide demand for its products.

For 2010, Wall Street is looking for per-share earnings of $1.87, up from 77 cents per share in 2009. For 2011, growth is expected to moderate, with the consensus earnings estimate of $1.97 per share. One issue that continues to hold back PC-centric firms like Intel and, to a similar extent, Microsoft (Nasdaq: MSFT), is the perception that technology is shifting away from the PC to the “mobile” world of smart phones and iPads.

There is no doubt that technology markets change, but change has always been a constant in this field, and Intel has managed to keep up with these changing markets. One reason is the company’s commitment to research and development. In the first quarter, Intel spent some $1.5 billion on R&D, or approximately 15% of sales. To put [this] in perspective, Intel’s annual R&D expenditures are usually greater than the annual sales of its chief rivals. Such a commitment to research and development should help Intel continue to survive and thrive in the technology markets of today and tomorrow.

Profit growth should continue to drive dividend growth. Intel currently pays a quarterly dividend of $0.1575 per share. That dividend was bumped up nearly 13% earlier this year. The stock currently yields nearly 3%, a substantial premium to the yield on the S&P 500 index of 2%. Intel’s strong finances—cash and short-term investments totaled more than $16 billion at the end of the first quarter—should be more than ample to fund the dividend and continued business investment.

The [equity] price dip is offering an excellent opportunity to begin building a position in these shares. Intel’s direct-purchase plan has a minimum initial investment of $250.

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