Microsoft & Intel Stock: 2 Dividend Tech Plays For The Future

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Written by Nick Ackerman

Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) have both been long-time holdings of mine. They have accomplished exactly what I’ve wanted out of them as an income investor – that is growing dividends over time. Both of these stocks are tech plays that can benefit from the drive of continued digitization. Besides paying dividends and being in the tech sector, that’s essentially where the similarities end.

MSFT has been a giant software business firing on all cylinders for many years now. This success has driven up the stock price to some rich values. Yet, there is room for continued growth, and analysts believe it heads higher.

INTC, on the other hand, has been the stock to bash. They’ve lost their competitive edge, and competitors Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) have been chipping away at their market share in recent years. That being said, INTC might be down, but it is most definitely not out. They are working on their turnaround, which should put them back on a growth path. They are still the dominant player and have the cash flow to pull it off.

MSFT, a massive software company, relies on INTC’s hardware to operate. Of course, there are more players in the middle of this that are also involved. But these are the two that I’ve invested in and believe offer a compelling argument for each. Both companies are on the opposite ends of the valuation spectrum.

Microsoft

We’ll begin with MSFT. This is a much easier sell. As I’ve said, they’ve been on a successful run for years now. That has pushed up their share price substantially – as well as their valuation. Their forward P/E ratio comes in at a stretched 36.21. However, that doesn’t dissuade me from continuing being long the shares. Morningstar puts the fair value of MSFT at $345. That would translate into some further upside here; at the time of writing, shares of MSFT are at $333.20.

The success has translated into material dividend growth and significant stock buybacks. In fact, a few months ago, they announced their dividend increase of 11% along with a $60 billion buyback. The total number of outstanding shares has been on a meaningful decline since around 2005. MSFT now has around the same number of shares outstanding as it did in the 90s.

Microsoft shares outstanding
Data by YCharts

The company has been a dividend payer going back to 2003, according to the investor website. That is coming on nearly two decades of paying out dividends to investors – not just the same dividends, but growing dividends over time. They started out slow for the first several years but began to ramp up the growth quite substantially.

MSFT YoY performance

(Source – Microsoft)

Over the last ten years, they have provided a compounded annual growth rate of nearly 13%, which means that the 11% increase recently was below the past decade’s average. Though it is still quite attractive and beating out the CAGR for the more recent time frames of 3 and 5 years.

Even more impressive, despite all the growth the company has experienced, analysts expect the next five years to deliver even more. Analysts expect from 2022 to 2026 that MSFT will continue to grow EPS by around 15.9%. Revenue growth is expected to be robust as well.

MSFT EPS estimates

(Source – Seeking Alpha)

That means they could still have the capacity to deliver growing dividends for at least another five years. Though realistically, anything could happen between now and then, which includes even higher growth as they’ve been known to smash analysts’ expectations consistently as well. Then if we factor in the low payout ratio of just ~27% for MSFT, and it is even more likely they will continue to pump out growing dividends.

Intel

Now, INTC is the one that is easy to bash. They haven’t done a whole lot except losing market share to competitors for a while now. With Pat Gelsinger in charge, that could all change. He took over the CEO role in early 2021. He certainly has some solid hopes for the company and significant enthusiasm. All the cash flow the company still makes quarter after quarter certainly doesn’t hurt either.

All that being said, a turnaround is never easy and doesn’t always work. No matter how ambitious or much cash can be thrown at it. So that obviously means there is potential here for things to go wrong. Which has meant that shareholders have been afraid to hold this stock. So much so that the forward P/E of this tech stock is just 9.65. They are being completely thrown out by investors as not worth their time.

To reiterate, turnarounds don’t always work out, so there are risks here, but I believe this valuation makes a compelling case on why you could go long. As a long-term investor, I’m not necessarily worried about what we might see in the next year or two. I’m more concerned about the next 5 to 10 years.

This is one of those “paid to wait” stocks too. They have been paying investors a dividend for around 28 years now, going back to 1993. That’s a longer run than MSFT, though MSFT has been able to deliver higher dividend growth. The last 10-year CAGR for INTC comes to almost 6%, definitely nothing to scoff at.

The number of consecutive years of growth for the dividend hasn’t been quite as impressive. Instead, they had frozen the dividend in 2013 and 2014 to the same quarterly amount. That being said, they still have seven years of consecutive growth and a trend that has clearly been in an upward trajectory. The upward trajectory for me is more important rather than being consecutive.

INTC dividend history

(Source – Seeking Alpha)

Despite the immense amount of capital they are going to be piling into their new foundry business – a part of their turnaround – they are still “committed to a healthy and growing dividend.” Here’s from their latest conference call;

When combined with the continued expansion of our current client and datacenter markets, we cannot, and will not, miss this opportunity. Investing now will enable us to reposition the Company to deliver double-digit revenue growth as these investments pay off. While these investments will pressure free cash flow in the short-term, our operating cash flow will remain strong, reflecting the high quality of our business.

And we’ve remained committed to a healthy and growing dividend. As with free cash flow, our gross margins will be below current levels for the next 2-3 years before recovering, but will remain comfortably above 50% as we continue to exercise financial prudence. We have the utmost confidence that our investment plans will ensure the Company’s long-term success and deliver attractive returns for our shareholders.

This would seemingly indicate that they are still committed to growing the dividend, despite the cash they’ll need to transition and build a stronger business.

Does that mean we will get a massive increase? Probably not. Could it mean no increase at all for this year? It most definitely could. However, what I believe is off the table is the elimination or cut of the dividend. They’ve announced the increases in the latter half of January for the last several years. So, we won’t have to wait long to see what they do.

For some context on what kind of revenue INTC pulls in, they are estimated to record $73.72 billion. They also generally beat EPS and revenue estimates, so this could be on the lower end. AMD has revenue estimates of $16.13 billion for 2021.

For a couple of final notes on INTC, a more recent announcement let shareholders know they’ll be unleashing value via spinning off Mobileye. This has been a fast-growing division within INTC that has been pent up inside. INTC will remain the majority holder, which means profiting from continued growth. At the same time, it helps them raise capital to invest elsewhere.

It wasn’t all that long ago that INTC bought Mobileye either, and the company has already delivered what is expected to be a “three-fold increase in just four years.” Not a bad investment at all that they can already capitalize on.

Then finally, one last note is that while the turnaround will likely take years – we could see some cracks of hope open up in 2022. Alder Lake launched on November 4th, 2021. That means we are likely to get a glimpse into how that CPU is performing in their next earnings release. Later in 2022, there should be the launch of the data center Sapphire Rapids CPU.

Conclusion

I want to think of MSFT as the slow and steady winner. The one to choose if you’re going to keep investing in what is working. However, slow wouldn’t be the right word to describe MSFT. They’ve been firing on all cylinders and could continue to perform incredibly well with continued digitization. They continue to offer products and services and continue to grow what they have.

INTC is a different story. They are the ones that need to prove they can turn around their business. It’ll likely take years and a lot of capital to do just that. At the same time, not so much capital that they can’t continue paying a dividend to investors. That being said, INTC is definitely not as seemingly as sure of a bet as MSFT, and risks are greater here. I believe the payoff could be quite worth it at the current valuation if they pull it off.

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