The combination of rising dividends and simultaneous share buybacks can be powerful.

Stocks quotes in this article: INTC

My top stock pick for 2023 is a bit out of the ordinary in terms of my past selections which, over the years, have tended to be very small and sometimes off-the-wall names.

My pick this time around is a behemoth whose shares have been hammered in 2022, down 46.5% on a total return basis.

It’s Intel (INTC) .

For perspective, this was a $68 stock less than two years ago, and closed Wednesday around $26, about where it traded in 2014.

Now, I am dead-set against pinning a stock’s future prospects to where it traded in the past. That can be a recipe for disaster, and its recognition is merely for perspective. Overly enthusiastic investors tend to elevate stocks too high relative to their value, but when lofty expectations are not met, can also punish them to a greater extent than is deserved. I think that’s where we are at this point with INTC.

The shares currently trade at 13x 2023 consensus earnings estimates, which is actually not all that far out of line from where INTC has traded over the past several years. However, for 2024, the consensus estimate rises to $2.72/share, for a forward price/earnings ratio of 9.5. That, we can work with (and yes, this is a bit presumptive, but the consensus is a fairly large group of 22 analysts).

Bolstering the story here is Intel’s 36.5 cent quarterly dividend, which equates to a healthy 5.6% yield. Intel has somewhat quietly become a dividend champion over the years, and has raised it at an 8.1% compound annual growth rate (CAGR) over the past 15 years. That clip has slowed in more recent years to 6.2% over the past seven years.

However, the company has also been active in share buybacks, reducing shares outstanding by about 13% since year-end 2015, although through Q3, the company did not repurchase any shares in 2022. The combination of rising dividends and simultaneous share buybacks can be powerful. Long-term Intel shareholders may disagree depending on their holding period.

As of the end of Q3, the company still had $7.2 billion remaining in repurchase authorizations. In May of 2021, the company reported that it would not focus on buybacks as much as in the past, but that was said at a time when the shares were trading in the $50’s.

The elephant in the room for Intel is the recession that we may already be experiencing. You’ve got to wonder, though, to what extent it is already priced in.

Who would have thought we ever see INTC trading at just 1.08x book value and yielding 5.6%? It is no longer the growth story of years past, sales and margins have slipped, yet it still boasts a 19.1% net profit margin over the trailing 12 months.

I certainly don’t expect the shares to head straight up from here, and plan on selectively and opportunistically adding to my position over the course of the year.

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