Some investors believe that Intel (NASDAQ:INTC) stock is cheap because it trades at 11 times its forward price-earnings ratio. Others believe INTC stock isn’t cheap because its earnings growth continues to decelerate.
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I’m still upbeat about INTC stock, simply because Intel’s free cash flow generation continues to be strong. That’s a much better indicator of value, in my opinion, than earnings or sales.
Intel expects 2019 free cash flow of $15 billion, 4.9% higher than a year earlier, and 27% above its five-year average of $11.8 billion. INTC generated $59 billion of free cash flow over the past five years, returning $55 billion (equaling 93% of its free cash flow) to shareholders in the form of dividends and repurchases of Intel stock.
In fiscal 2018, Intel repurchased $10.7 billion of INTC stock at an average price of $49.38 per share. In 2014, it also repurchased more than $10.8 billion of its stock at an average price of $32.47 a share. Based on the stock’s Oct. 14 closing price of $51.64, Intel’s return on investment from these two large buybacks is 32%.
Furthermore, INTC has reduced its share count by almost 8% over the past five years.
None of this would have been possible without its strong free cash flow.
Free Cash Flow Yield
Back in June, I suggested that Intel stock had, as in December 2017, become an attractive name for value investors. I went on to suggest that Intel stock was worth buying in the mid-$40s for those willing to hold it for five years or more. I recommended that shorter-term investors wait until INTC fell into the $30s before buying it.
Let’s assume for a second that INTC stock will fall to $39 per share.
Based on Intel’s fiscal 2019 guidance, its free cash flow yield at that price would be 7.8%. That’s very close to the 8.8% free cash flow yield of the Pacer US Cash Cows 100 ETF (NYSEARCA:COWZ). COWZ is a passive ETF that invests in the 100 Russell 1000 companies with the highest free cash flow yield in the index.
Of course,Intel stock is currently trading in the low $50s, giving it a more subdued 6.0% free cash flow yield, which is still much better than many of its semiconductor peers.
The Dividend Yield of INTC Isn’t Too Shabby
Considering Intel’s consistent free cash flow generation and its healthy 2.4% dividend yield, it’s hard to understand why more investors don’t buy INTC stock instead of riskier stocks like Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA).
I do like the idea of getting paid to wait for Mobileye or one of Intel’s other innovative businesses to take flight.
InvestorPlace contributor Thomas Niel recently argued that the company’s low 36% payout ratio, along with its five-year dividend growth rate of 6%, makes Intel a solid dividend-paying stock. I couldn’t agree more.
I recommend that long-term investors buy INTC stock if the company’s share price falls into the $40s.
At $52, investors who are more interested in dividend income than capital appreciation should buy INTC due to its excellent free cash flow generation.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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