I'm not crazy. honest.

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Why I Bought Intel Stock (And Why You Should Too)

I just added semiconductor giant Intel (NASDAQ:INTC) to my personal portfolio.

So level with me… Am I nuts to buy Intel stock?

I’ll start by admitting that the big-picture risks for Intel stock are clear — as they are for all PC-focused businesses, from other semiconductor plays like Marvell (NASDAQ:MRVL) and Advanced Micro Devices (NYSE:AMD) to desktop and laptop giants Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ). Simply put, in a post-PC age, as mobile computing becomes the way of the world … how will these companies adapt and find growth?

However, there are a host of factors that prompted me to put some faith in Intel stock despite this mammoth technological shift that has been driven by Apple (NASDAQ:AAPL) iPads and iPhones along with Google (NASDAQ:GOOG) Android-powered devices.

Scale: Intel is the largest semiconductor manufacturer on the planet, with 15.9% market share in 2011 that was bigger than Nos. 2 and 3 combined — for the record, that’s Samsung at 9.3% and Texas Instruments (NASDAQ:TXN) at 4.5%. While the mobile business might eat into some of that market share over time, that is not the case right now. In fact, Intel’s 2011 market share surged to a 10-year high, according to industry publication iSuppli.

Dividend: The yield of this tech giant is an impressive 4.2% right now. That in itself is attractive, but the increase in distributions also is a plus for me. In late 2007, Intel paid 11 cents a quarter. Now it’s 22 cents. A 100% increase in dividends during the past five years — a period when some payers cut or eliminated dividends because of the financial crisis — is no mean feat. Furthermore, that 22 cents a quarter is a roughly 40% payout ratio as a portion of total earnings. So it’s not just sustainable, but also set up for incremental increases in the next few years.

Valuation: Intel’s forward guidance has been disappointing, but at current estimates, the FY2013 earnings forecast is $2.03 a share. Divide its current pricing of around $21.50 by that EPS, and you get a forward P/E ratio of less than 10. Furthermore, Intel stock has a five-year price-to-earnings growth ratio of 0.85 and a one-year PEG of less than 1.1 — implying that INTC has become pretty fairly valued after the recent declines.

Fundamentals: Intel did break its 11 straight quarters of year-over-year revenue increases with its recent earnings report. But it’s worth noting how strongly Intel profits and revenue have grown since 2009, when it posted a small quarterly loss in the second quarter. Barring the bear market crash of late 2008 and early 2009, the longest Intel has traded below $20 was a brief stretch of August to November in 2010 … and since then, both the top line and bottom line have improved considerably.

Cash: Intel boasts $10.5 billion or so in cash and short-term investments as of Sept. 30. In fiscal 2011, it threw off an operating cash flow of almost $21 billion and is tracking that in fiscal 2012. This is hardly a business in trouble, bleeding down reserves with silly buyouts or struggling with a debt load to keep the lights on.

Naïve Microsoft Hopes: What if the Microsoft (NASDAQ:MSFT) Surface tablet catches on in an enterprise setting like the tech company hopes? It’s not unrealistic, considering it’s essentially an iPad that runs Office and has a tactile keyboard as part of the package. The gadget has Intel inside, and could help legitimize INTC move into the mobile semiconductor space. Also cooking is the Atom Z2760 for Windows 8. Maybe it’s naïve to hope for a Microsoft turnaround, and I admit that. But even a lateral move for MSFT with Windows 8 and Surface would help transition away from desktop and laptop reliance that Intel is tied into by virtue of its synergy with Microsoft. And if and when a secular recovery in IT spending happens, expect Intel stock to benefit even more.

So again, am I crazy?

I understand the risks — and I know that the chopping of chipmakers has been well-deserved thanks to slowing global demand, mobile challenges and general malaise. However, as a long-term investor I see big potential here 12 to 24 months down the road.

Typically, stocks that set 52-week lows seem to keep setting new lows in the months ahead. And generally speaking, I think it much safer to buy a flawed stock in a strong area of the market — perhaps an underperforming healthcare stock like Johnson & Johnson (NYSE:JNJ) because the baby boomer demographics are lifting the entire sector long-term, for example — than a stock that looks good but is fighting against big-picture trends that are squeezing the very basis of its business.

But I feel like the bullish case for Intel stock is enough to give it the benefit of the doubt. It’s not like the company hasn’t started adapting — with the layoff of more than 5,000 in 2009 and the McAfee buyout in 2010, the company is adjusting. I figure worst-case scenario for INTC is a lagging performance that is offset by the plump dividend.

What’s your take? Share your insights below.

Related Reading

  • Ratings cuts in September have gutted chipmakers in the last several weeks. (Forbes)
  • On the other side of the equation, Daniel Putnam makes the case against Intel. (InvestorPlace)
  • Again, my hopes may be naïve but Paul Otellini seems stoked about Windows 8 and Intel’s prospects. Here’s an exclusive interview from the always insightful Ina Fried. (AllThingsD)
  • FWIW, Intel is investing heavily in research with a $3 billion expansion plan, so this isn’t the last chapter by any stretch. (Portland Business Journal)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple and Intel but no other stocks named here.

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