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.
Positive Operating Cashflow
Every business needs to manage cash so that enough money is available to finance operations and handle any emergencies. In the preceding quarter, Intel generated an operating cash flow of $4.3 billion and net cash outflow of $-2.78 billion, compared to $-636 million in the first quarter of 2012. On the other hand International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO) reported net cash flow of $173 million and $-1725 million, respectively. Intel repurchased its shares at a cost of $625 million and achieved the best net cash flow growth in the entire semiconductors industry. Intel’s balance sheet represents cash in hand of $8.5 billion as compared to IBM and Cisco cash in hand of $10.4 billion and $9.8 billion, respectively, but Intel has a lower long term debt as compared to International Business Machines Corp. (NYSE:IBM) and Cisco Systems, Inc. (NASDAQ:CSCO), which increases its ability to sustain its dividend.
Final Words
These three companies have the ability to maintain their yields and increase their payout ratios. Intel has a history of dividend growth, but investors should keep a close eye on the success of its Bay Trail and Clover Trail chips. The success of this hardware will decide the future of Intel in the handheld industry.
Red Chip has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of Intel and International Business Machines.
The article Three Dividend Payers with Good Payout Ratios originally appeared on Fool.com and is written by Red Chip.
Red is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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