Intel's 4.99% Yield and 11x P/E Make It a Value Investor's Favorite

Intel Corp (INTC) is in the middle of a massive capital spending boom. This has been depressing its earnings and margins and negatively impacting the semiconductor's free cash flow. But the dividend yield is also now high at 4.99%, making INTC stock a favorite of value investors.

Intel's huge capital spending also gives the stock a low price-to-earnings (P/E) multiple, trading at 11.2x forecast for the year ending Dec. 2023. It is quickly becoming a favorite of value investors.

In fact, the CEO, Pat Gelsinger, projects that Intel will make a negative $2.0 billion in free cash flow during 2023. There are several reasons for this. One major reason is a 10% decline in PC sales forecast for the year. As long as the US and the world face a prolonged recession, the company's revenue and cash flow face huge pressures.

Dividend Appears Secure

So far the company is not talking about cutting the dividend. In fact, here is what David Zinser, Intel's CFO, said in the Q2 earnings release:

“We remain fully committed to our business strategy, the long-term financial model communicated at our investor meeting and a strong and growing dividend.”

This shows that Intel may consider raising the dividend. For example, the company has hiked its dividend annually for the past 7 years. On Sept. 16 it declared its fourth qu8arterly dividend of 36.5 cents per share. That implies that its next dividend could be higher.

This also puts the dividend at an annualized rate of $1.46 per share, before any dividend hike. So, at $29.24 per share as of Friday, Sept. 16, INTC has a 4.99% dividend yield. This is significantly higher than its average yield of 2.61% over the past 4 years, according to Seeking Alpha.

It is also well covered by the company's cash flow from operations (CFFO). In the past year ending June 30, the dividend cost Intel $5.8 billion, but its CFFO was much higher at $22.54 billion.

As a result, investors can probably depend on this dividend as being secure.

Where This Leaves Investors in INTC Stock

So far INTC is down over 18.5% in the past month and off 45% year-to-date. This provides value investors the ability to buy in at a bargain price. For example, the theory here is that the stock already reflects a huge downturn in the company's fortunes going forward. After all, the market tends to discount 6 to 9 months forward.

On the other hand, there is little that could prevent the stock from falling further. The high dividend yield is one factor that could slow this down, especially if the dividend stays secure.

Moreover, cash-secured put investors can make additional income here by shorting out-of-the-money puts. For example, look at the Barchart options chain below.

This shows that an investor can short the $27.50 strike price for puts expiring on Oct. 21 and receive 69 cents per put contract. That works out to an immediate gain of 2.50% for a purchase price that is 6% below today's price of $29.24 (i.e., $69 per contract/$2,750 per 100 shares purchased at $27.50 upon exercise). 

For more conservative investors, the $26.00 strike price which is 11% below today's price, offers a 1.46% yield at 38 cents (i.e., $0.38/$26.00).

This shows that there are additional ways for value investors to play Intel, which is deeply undervalued.