Robert Swan, the CEO of Intel Corporation INTC, has been buying stock in the chipmaker this year in July and October.
Part of the reason might be explained by the below one-year price chart, which shows a declining stock price:
Swan had no shortage of shares already in his holdings before this year - after all, he is the CEO and has received millions of dollars worth of as part of executive compensationplans. Bloomberg called him the seventh-highest-paid CEO of 2019 and provided this breakdown of his $99,022,847 compensation for the year:
- Salary: $1,227,300
- Bonus: $3,682,100
- Stock awards: $63,762,605
- Option awards: $30,047,742
- Perks: $303,100
In that context, his purchases outside of this don't seem that large:
- July 24: Bought 8,021 shares at a cost of $296,958.
- Oct. 28: Bought 8,021 shares for $313,208.
It also turns out this wasn't the first year in which he bought stocks when the price was down somewhat. I've marked two other dates where he purchased the company's stock in the chart below:
When officers of a company buy their own stock, beyond what they receive through their compensation, it's often considered a sign of confidence. More specifically, it could be a sign that the officer thinks the shares are undervalued and will rise in the future.
That may be an important part of what we're seeing here - the CEO is making an investment that he expects will rise in value.
When I last wrote about Intel on August 20, the company had a GuruFocus financial strength rating of 7 out of 10, a profitability rating of 9 out of 10 and was undervalued with a valuation rating of 8 out of 10.
Since then, its financial strength has slipped back a notch to 6 out of 10, the profitability has remained the same and its valuation is higher at a rating of 9 out of 10.
What can Swan expect from owning the stock? Let's examine the potential total return if he continues to hold the stock for some years, based on the current prices and metrics and my own valuation assessment.
First, there should be capital gains if the stock once again gains the confidence of investors, which I think it should given Intel's strong profitability. There is a link between profits and share prices, but it is not direct because of Mr. Market's influence.
Here's a 10-year price chart with a trendline:
While Intel stock may be in a swoon now, the trendline tells us it has risen at an average annual rate of 11.41% over the past decade (over the past five years it has grown even faster, at an average rate of 14.91%).
To that, we can add the dividend, which is currently 2.91% and has grown an average of 6.79% per year over the past 10 years (or an average of 7.13% over the past five years):
According to the five-year yield-on-cost, the dividend will rise to 4.11% over the next half-decade, assuming investors buy and hold for at least that long and if Intel continues to grow the dividend at the same rate as it has grown it over the past five years.
Third, we can add in increases in earnings per share because the company has actively repurchased its own stock at an average rate of 2.16% per year, as shown in this 10-year chart:
Over the past five years, the average buyback rate slipped back slightly to 2.08%, so let's make a conservative case by adding together the three 10-year historical rates:
"Total return = 11.41% + 2.91% + 2.16% = 16.48%"
Thus, based on past performance, shareholders can reasonably expect to gain nearly 16.5% per year from an investment in Intel stock. That's merely a simple model; the returns could be higher or lower if we were to enter more variables. Most notably, it would be higher if we were to factor in the five-year dividend rate, which is expected to be almost 2% higher in five years' time.
When I assessed Intel previously, I noted the firm faced several important challenges:
- Apple AAPL announced it would stop using Intel chips in its Mac computers.
- Its new 7nm chips have been delayed and now aren't expected until 2022 (it was also late with its 10nm chips a few years ago).
- Its two biggest rivals, Nvidia NVDA and Advanced Micro Devices AMD, have been gaining, both technologically and in investor confidence.
Using the same model as above for total potential future earnings, Nvidia could offer a dividend of 0.11%, an average capital gain of 48.40% and a share repurchase rate of -0.52% (it has issued more shares than it bought back) for a total of 47.99% per year. That's much higher than Intel, but it is also considerably higher than its one-year earnings before non-recurring items. As a result, I would be concerned the share price might take a hit in the future.
Advanced Micro Devices also outperforms Intel on the basis of average capital gains over the past 10 years at 28.6%. It has no dividend and it too has been increasing its share count by an average of 4.92% per year. That produces a total potential future return of 23.74%.
On the other hand, both of Intel's competitors are considered significantly overvalued, while Intel is ranked as modestly undervalued. Below is the GuruFocus Value chart for Advanced Micro Devices:
Nvidia's overvaluation can be seen in its own GuruFocus Value chart below:
Realistically, I think all three chipmakers are worth purchasing, but Intel is the only one that is available at a reasonable price now.
Among the investing gurus followed by GuruFocus, 20 have positions in Intel, 17 have positions in Nvidia and 8 have holdings in Advanced Micro Devices. It seems there is no outstanding advantage here for any of the companies.
Conclusion
CEO Robert Swan has been buying stock in his own company, despite already receiving generous amounts through his position.
In doing so, I think he has acted like a value investor, buying shares in a company he believes in. All three of the leading chipmakers look like good long-term investments, based on the profusion and extension of digital devices, but Intel is the only one priced to buy.
Intel is a more mature company than the other two, a status characterized by legacy businesses and diverting at least a portion of its free cash flow into dividends, which likely contributes to the undervaluation.
Disclosure: I do not own shares in any of the companies named in this article.
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