Intel Stock Is Surviving PC Industry’s Downturn
In today’s bloated stock market, value is hard to find. That’s why when something as solid as Intel Corporation (NASDAQ:INTC) stock is having a pullback, income investors should pay attention.
Okay, you might argue that Intel stock is not what it used to be because the personal computer (PC) industry is slowing down. And indeed, according to the latest report from the International Data Corporation (IDC), worldwide PC shipments fell 3.9% year-over-year to 68-million units in the third quarter. Since Intel built its business by making microprocessors found in most PCs today, the ongoing trend in the PC market could be a serious challenge for the chip maker. (Source: “PC Competitors Position for Share and Growth, Despite Challenges, According to IDC,” International Data Corporation, October 11, 2016.)
But should that deter you from liking Intel stock? Not really. Despite headwinds from the PC industry, Intel’s PC business actually grew in the third quarter. Last month, the company reported that revenue from Client Computing Group, its PC chip segment, rose 4.5% year-over-year to $8.9 billion. Since Client Computing Group is the largest segment at Intel, results like this should be reassuring for dividend investors. (Source: “Intel Reports Record Quarterly Revenue of $15.8 Billion, Up 9 Percent Year-Over-Year; Operating Profit of $4.5 Billion,” Intel Corporation, October 18, 2016.)
But what if the Intel’s PC business starts to decline? Well, in that case, Intel could still be fine. This is because other than having a sizable PC business, Intel also has other segments, and some of them are growing rapidly. The most notable one is the Data Center Group segment, which has been benefiting from the rise of the cloud computing industry. Intel might not be known as a direct provider of cloud services, but those that are—including Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN)—use Intel’s chips in their servers.
To see how big a boost the booming cloud computing business has given to Intel, just take a look at the growth rate of its Data Center Group. According to the latest earnings report, Intel’s Data Center Group revenue surged 10% year-over-year to a record $4.5 billion. In particular, revenue from cloud service providers increased by 32% from the year-ago period. (Source: “Intel’s CEO Brian Krzanich on Q3 2016 Results – Earnings Call Transcript,” Seeking Alpha, October 19, 2016.)
The neat thing about Intel’s Data Center Group is that server chips are priced higher and command higher margins compared to PC chips. Fast growth in the server chip business could result in even faster growth in Intel’s bottom line.
The Data Center Group is not the only segment setting new records at Intel. Revenue from the Internet of Things Group rose 19% year-over-year to an all-time record of $689.0 million. Growth was across the board in retail, video, and transportation pertaining to the Internet of Things.
For dividend investors, there are two things to note about INTC stock. First, despite industry headwinds, the company’s PC business is far from over. Second, with double-digit growth rates in the Data Center Group and Internet of Things Group, Intel has plenty of potential going forward. Combined together, these two booming segments generated $5.2 billion of revenue in the third quarter, accounting for nearly one-third of the company’s total revenue.
And if you are wondering whether Intel’s dividends are safe, keep in mind that the company is not paying out all its earnings. In the third quarter, Intel generated approximately $5.8 billion in cash from operations, earned an adjusted net income of $3.9 billion, and paid $1.2 billion in dividends. However you look at it, Intel’s current level of dividends should be safe.
The Bottom Line on INTC Stock
With a three percent dividend yield and the potential to capture growth in both cloud computing and the Internet of Things, you’d think that Intel stock would be a hot commodity, but that’s not really the case; since last month’s earnings report, INTC stock has tumbled 8.4%. This recent dip in Intel stock could represent an opportunity for dividend investors to get onboard.