Intel Corporation (INTC), International Business Machines Corp. (IBM), Cisco Systems, Inc. (CSCO): Three Dividend Payers with Good Payout Ratios

The aim of every business is to create shareholder wealth, and generating a profit is the measure of company’s ability to create this wealth. In addition to focusing on profit and turnover, a business needs to consider its cash flow in order to fund operations and to return shareholder value.

Most profitable and financially sound companies pay a dividend. However, it doesn’t mean that the companies that do not pay dividends are not making profits. Every business has its own unique insight into maintaining a stable balance between growth and returning shareholder wealth.

Fundamentals

Intel Corporation (NASDAQ:INTC) is the world’s largest semiconductor company. During the first quarter of 2013, it generated revenue of $12.6 billion, down 7% from $13.5 billion in the previous quarter; net income of $2 billion, down 17% from $2.5 billion in the last quarter of 2012; and an EPS of $0.40.

Intel Corporation (NASDAQ:INTC) generated $4.3 billion in cash from operating activities and paid dividends of $1.1 billion.  Intel has been a key player in PCs and servers, but the drop in PC sales has made investors nervous about its future growth. The company’s net profit margin shrank from 18% to 16.25% quarter over quarter. Margin shrinkage led to reduction in EPS growth, and any further decline in net margins will have an adverse effect on company value.

Payout ratio

Lets take a look at Intel Corporation (NASDAQ:INTC)’s payout ratio. Despite the deterioration of EPS it has continuously increased its dividend and payout ratio with a huge increase in the last two quarters. In the previous quarter the company’s payout ratio was 43%, compared to 39.44% in the last quarter of 2012, while it was 35.81% in the third quarter of 2012.

If we review the dividends of International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO), both companies have a comparatively lower payout ratio than Intel Corporation (NASDAQ:INTC).

A very high dividend can also be a warning sign because it shows that the company doubts it ability to reinvest and generate future growth. International Business Machines Corp. (NYSE:IBM)’s payout ratio is 23.17% and it distributes a dividend of $0.84 per share, while Cisco Systems, Inc. (NASDAQ:CSCO) had a payout ratio of 29.44% and dividend of $0.17 for its third quarter.

Intel Corporation (NASDAQ:INTC)’s trading at $24.71 and rose nearly 16% in 2013, while shares of International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO) appreciated 4% and 18%, respectively. Based on the price-earnings (P/E) ratio of 12.34x, Intel is currently trading at a discount as compared to industry averages.