This ‘Forever’ Stock Could Return At Least 30%

Warren Buffett is always quick to warn investors about becoming emotionally attached to a stock they own. 

To paraphrase the Oracle of Omaha, “That 100 shares of stock doesn’t know that you own it.” I’ve echoed that philosophy on occasion, telling clients that a hundred shares of Cisco (Nasdaq: CSCO) won’t tell you it loves you when you come home at night.

But as investors, we sometimes find ourselves gravitating toward the same group of stocks because of their dependable performance. Buffett himself is guilty of this with holdings such as Coca-Cola (NYSE: KO) or The Washington Post Co. (NYSE: WPO), which have served as two of Berkshire Hathaway’s (NYSE: BRK-A, BRK-B) stalwart holdings for decades. 

At StreetAuthority, we refer to these names as “Forever” stocks. But there’s one stock in particular I find myself coming back to time and time again: Intel (Nasdaq: INTC).

Long Live The PC
Fifteen years ago, the strongest argument for owning shares of Intel was that the company manufactured the brains for 80% of the world’s computers. As the dot-com bubble grew bigger, doe-eyed investors uttered that phrase and others as they drove tech stock prices and price-to-earnings (P/E) ratios up to unsustainable, nosebleed heights.#-ad_banner-#

The bubble popped, attitudes soured, and tech shares drifted around in a bear market that seemed to have no end. However, I haven’t used a computer any less since then — and most likely, neither have you. Although personal computing has evolved from desktop to laptop to smartphone to tablet, the need for processing speed has not disappeared.

Like any well-managed company, Intel has continued to adapt. Three years ago, the company acquired software security giant McAfee. Most recently, Intel acquired ST-Ericsson’s GPS division, a joint venture between European telecom component manufacturers Ericsson (Nasdaq: ERIC) and STMicroelectronics (NYSE: STM), in a push to gain more component market share in the GPS device segment. 

It’s clear Intel’s making the right moves, but you would never know it by the price action of the stock.

Aside from the bear market lows of 2002 to 2003 and 2008 to 2009, the stock has lumbered in a range of $20 to $25 on average while the company has piled up cash and increased its dividend at an annual average rate of nearly 10% over the past five years.

  Apple has chosen to power the latest generation of MacBook Air laptops with Intel’s Haswell-based processors.  

Imagine getting a nearly 10% pay raise every year for the past five years. Intel shareholders did. And the current levels of the stock price are an excellent entry point.

Signs Of Growth 
Intel is launching a slew of new products, most notably its Haswell architecture CPUs (central processing units) and Atom-based system-on-chip (SoC) devices. The new Haswell platform uses only 17 watts, less than half the average power consumption of the current generation of computer CPUs. Apple (Nasdaq: AAPL) is basing its newest generation of MacBook Air laptops on this processor, boosting their performance markedly.

The company is on track to spend nearly $11 billion on capital expenditures. Only $2 billion has been earmarked for land and buildings. The rest of Intel’s dry powder will be focused on developing new products and gaining market share in the smartphone and tablet chip segment. Currently, that share sits at just 5.5% worldwide. With Intel’s might and money, there’s room to grow.

The Numbers Speak For Themselves
Another reason (and probably the main one) I find myself coming back to Intel is the company’s consistent financial performance.

  • Over the next year, sequential revenue is expected to grow by 6%, to $56.7 billion in 2014.
  • Earnings per share are projected to grow by nearly 11%, from an estimated $1.92 this year to $2.13 in 2014.
  • Even more astonishing is the rate at which Intel’s pile of cash is growing. The company is on track to increase its cash by 10% from $12.8 billion last year to $13.7 billion this year, and analysts expect cash to grow even more significantly in 2014, to $17.9 billion.
  • As mentioned, Intel returns cash to shareholders in the form of dividends. The company has increased the common dividend an average of 12.6% annually over the past four years, from 12.8 cents per share each quarter to 22.5 cents, nearly doubling its payout.

Risks to consider: Intel’s business relies heavily on the traditional PC market. Although reports of the PC’s imminent demise are exaggerated, smartphones and tablets are replacing them as our go-to personal computing devices. The company is preparing for this by investing heavily in the mobile and tablet chip segment. Intel is also always at risk on a macroeconomic level, as the semiconductor sector is highly cyclical and subject to the health of the global economy. There are signs of economic growth in the U.S., but the European market is still soft, and there’s concern about the sustainability of China’s growth story. Intel seems to have taken these factors into consideration and continues to diversify its product mix while hoarding rainy-day cash.

Action to take –> A “Forever” stock like Intel is a natural fit in a well-constructed portfolio. The stock currently trades near $24 with a forward P/E ratio of 12.5. A 12-month price target of $31 makes sense. A 30% price appreciation would translate into a 24% increase of the forward P/E, which is reasonable based on the company’s consistency. Factoring in the 3.75% dividend yield would bump the total return up to nearly 34%.

P.S. — Intel is part of a special group of “Forever” stocks we’ve identified. These are world-dominating companies that pay investors a fat dividend and dig a deep moat around their business to fend off competitors. They’re stocks you can buy, forget about and hold “Forever.” To learn more about these stocks — including some of their names and ticker symbols — click here.