This text was revealed on Dividend Kings on Tuesday, December twenty seventh.

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Dividend development blue-chips are the best-performing asset in historical past, delivering 7X extra inflation-adjusted wealth during the last 50 years than non-dividend shares.

However there’s a well-known saying on Wall Avenue that Howard Marks likes to remind us of.

A six foot man can drown in a river that is simply three toes deep…on common.” – Howard Marks

It is not sufficient to purchase and maintain dividend blue-chips and hope issues work out nicely.

44% of all US shares do not simply fail; they fail “catastrophically,” which means they fall 70+% and by no means get well.

Even the venerable dividend aristocrats have, amongst their former ranks, catastrophic failures corresponding to Basic Electrical (GE). Heck, Winn-Dixie and Kmart are former aristocrats that went bankrupt. Kmart is maybe the one dividend aristocrat to go bust twice, together with after being purchased by Sears, who filed for Ch 11 later.

Our favourite holding interval is ceaselessly. We’re simply the alternative of those that hurry to promote and guide earnings when firms carry out nicely however who tenaciously grasp on to companies that disappoint. Peter Lynch aptly likens such conduct to reducing the flowers and watering the weeds.” – Warren Buffett

Warren Buffett’s favourite holding interval could be ceaselessly, however that does not make him a “purchase and maintain ceaselessly” investor. Somewhat, he is a “purchase and maintain ceaselessly…or till the thesis breaks” model of investor.

Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) are two legendary tech utilities providing enticing yields and have been two of the best-performing shares in historical past.

Nevertheless, one among them is firing on all cylinders, and the opposite is one I would personally keep away from proper now.

Let me present you why Cisco is a high-yield tech utility conservative long-term earnings buyers can belief and why Intel’s 5.6% yield is not as enticing because it seems.

Why I Would Keep away from Intel Proper Now

Intel is buying and selling on the highest yield in its historical past. If the funding thesis had been intact, it might actually be the perfect time in historical past for earnings buyers to purchase it.

Nevertheless, profitable long-term earnings investing is not nearly excessive yield, however SAFE and GROWING high-yield.

Intel’s dividend observe file is a really stable one. It has been rising its dividend for seven consecutive years and hasn’t lower the payout for 23 consecutive years, ever because it started paying a dividend.

Am I warning earnings buyers away from Intel as a result of the dividend is unsafe? Not likely.

Intel’s dividend prices $6 billion per 12 months. Does its free money circulate cowl that? Not even shut.

Is Intel a speculative dividend inventory as a result of its free money circulate is not anticipated to cowl its dividend by way of at the least 2025? I would not go that far because the cause for that could be a CAPEX super-cycle that could be a pure a part of the semiconductor trade.

There’s a cause why credit standing businesses contemplate 50% FCF payout ratios secure for this trade, barely beneath the 60% guideline for many different industries.

Intel is anticipated to spend $93.3 billion on new chip plans known as Fabs by way of 2025. New fabs can price $10 to $15 billion every, and that is why the protection of Intel’s dividend comes all the way down to its stability sheet.

• Intel’s dividend is anticipated to be frozen in 2023
• after which improve by 1 penny per 12 months in 2024 (lower than 1%)
• and presumably stay frozen in 2025

Intel Credit score Rankings

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(Sources: S&P, Fitch, Moody’s)

All three main score businesses have Intel rated as A+ damaging outlook, which means a 33% probability it will get downgraded to A or presumably even A- inside two years. However an A-rating remains to be a robust stability sheet, with loads of borrowing energy to help the 5.6% yielding dividend.

We anticipate working outcomes will stay weak over the subsequent 12 months or so and that its expertise roadmap could come below strain or delayed…Close to-term damaging macroeconomic tendencies are including to already challenged enterprise prospects. The damaging outlook displays our expectation for weaker working efficiency than we forecast in fiscal 2022 and 2023 because of difficult macroeconomics and the corporate’s execution misstep with Sapphire Rapids.:” – S&P

Intel has lengthy struggled with falling market share to Superior Micro Units (AMD), and its roadmap for chip design has seen quite a few setbacks. Now we face a world recession in 2023 that is anticipated to sluggish the chip trade’s and Intel’s development greater than most.

Intel’s missteps and far larger spending are anticipated to decrease EPS by 66% between 2021 and 2023.

The excellent news is that it is finally anticipated to begin rising once more except administration retains botching its chip design roadmap.

We lowered our moat score for Intel to slender from huge, as we’re not sure that the agency can generate extra returns on capital over the subsequent few years…

We consider Intel’s price benefit has eroded, because it confronted vital product delays related to its varied 10-nanometer course of applied sciences. Intel’s x86 rival, AMD, and its foundry accomplice, Taiwan Semiconductor Manufacturing, or TSMC, have mixed to leapfrog Intel in cutting-edge processors.” – Morningstar

Intel’s aggressive benefit has been weakening for years as rivals like Taiwan Semi (TSM) outcompete it on R&D effectiveness.

Nobody spends extra on R&D than Intel. In reality, INTC outspends TSMC greater than 3X every year on this space.

However whereas INTC struggles to even good its 7nm chips, TSM is simply three years away from 2nm chips. In reality, TSM is investing $32 billion into a brand new fab that it believes might be prepared by the top of 2026 to provide 1nm chips.

Now that is to not say that Intel would not assume it might compete with TSMC. In reality, its up to date roadmap claims it might beat TSCM to a 2nm chip, with business gross sales in late 2024.

The distinction is that when TSMC says it is going to ship revolutionary new chip expertise, it delivers. Intel has constructed up a formidable observe file of lacking deadlines, and its earnings are struggling consequently.

How briskly can Intel develop sooner or later? That is very robust to say. The perfect out there consensus forecast is presently -1.2% yearly by way of 2024.

What’s Intel traditionally price rising at -1.3%? About 11.3X earnings. In different phrases, it is crashing inventory value has not been a perform of irrational market pessimism however collapsing fundamentals.

May Intel theoretically at some point show an exquisite high-yield funding? Positive, if it might return to eight+% development because it’s traditionally delivered for 20 years.

However as issues stand now?

Consensus Lengthy-Time period Return Potential

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(Supply: DK Analysis Terminal, FactSet, Morningstar, YCharts)

The perfect present analyst estimates are that Intel presents bond-like future returns, because it spends a fortune on new fabs that to date have not been in a position to sustain with its rivals.

The bullish case is stable 13% to 14% long-term returns. However not like many high-yield blue-chips that provide 13% return potential (like MO), Intel would not supply a robust valuation increase.

As we have simply seen, Intel rising at these charges, is pretty valued and presents an 8% annual return potential for the subsequent two years. It is also considerably beneath that of Cisco, which, not like Intel, has been firing on all cylinders for years.

Why Cisco Is A Reliable Excessive-Yield Tech Utility

Tech utilities like Cisco supply beneficiant, secure, and steadily rising earnings and stable returns.

Cisco Whole Returns Since 2011 (When It Grew to become A Dividend Inventory)

Cisco is not a inventory you personal to beat the S&P or development shares; that is not its job.

Cisco’s job is to generate market-like returns with far superior yields, and it is finished that job admirably for 11 years, even throughout one of many strongest bull markets in US historical past.

The important thing to Cisco’s success is its diversified “one-stop-shop” expertise and rising recurring income stream.

We view Cisco Programs because the dominant drive in enterprise networking and anticipate it to retain its energy in each legacy and future networks. Cisco holds main market shares throughout switching, routing, and wi-fi entry, with robust complementary positions in safety and collaboration. We consider Cisco’s portfolio is positioned appropriately to learn from tendencies towards hybrid work and cloud environments. It presents probably the most complete suite of capabilities throughout converging networking and safety markets, and we deem its intertwined merchandise as sticky and worthy of a large financial moat.” – Morningstar

Not all of Cisco’s companies can develop in all financial circumstances; mixed, they’re nonetheless producing stable mid-single-digit development.

Cisco’s give attention to its R&D price range is constant, specializing in combining knowledge analytics into its enterprise {hardware} options.

Cisco’s recurring software program gross sales are nonetheless rising at 11%, and recurring subscription income now makes up 43% of whole income.

Together with {hardware} subscriptions, subscription income is rising at 12%, twice the speed of the general firm. Because of this increasingly more of Cisco’s gross sales have gotten subscription-based, and financial cyclicality is declining over time.

Cisco’s subscription gross sales are anticipated to develop at a 7.4% annual price, even by way of the worldwide financial slowdown. Its margins are anticipated to stay intact, regardless of loads of competitors from rivals like Arista Networks (ANET) or Palo Alto Networks (PANW), and Fortinet (FTNT).

So does that imply that Cisco will develop at double-digits over time as soon as the recession ends? Seemingly not.

Analysts anticipate about 7% long-term development from Cisco. Why a lot slower than its subscription gross sales?

As a result of Cisco’s legacy {hardware} enterprise remains to be cyclical, and the worldwide slowdown is dragging on general development.

However the excellent news is that Cisco is a robust free money circulate generator.

• 2022 free money circulate margin 27%
• 2025 free money circulate margin consensus 28%

A couple of-fourth of each greenback drops straight to the underside line, making Cisco’s 3.2% yield so secure.

• $6.25 billion in annual dividend price
• $8.25 billion in annual retained free money circulate

Cisco’s rivers of recurring free money circulate enable it to continue to grow the dividend steadily yearly, even in recessions. All whereas sustaining a rock-solid AA-rated stability sheet in line with S&P.

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(Supply: S&P)

Cisco has $12 billion extra cash than debt and is producing $8 billion yearly in retained free money circulate.

It has entry to $23 billion in liquidity proper now, greater than sufficient for its frequent tuck-in acquisitions.

And these are simply the explanation why Cisco’s 3.2% yield could be very secure. There are many causes to be a long-term investor in Cisco.

Cisco: A Grasp Of Threat Administration

Even Extremely SWAN (sleep-well-at-night) firms have advanced threat profiles and right here is Cisco’s.

CSCO’s Threat Profile Contains

• Inherent cyclicality of the tech {hardware} trade (falling with recurring income transition)
• Disruption threat (commodity white field options are a menace to its high-margin enterprise)
• M&A execution threat (CSCO makes loads of small bolt-on acquisitions)
• Labor retention threat (tightest job market in over 50 years, and tech is a high-paying trade)
• Cybersecurity threat: hackers and ransomware
• Forex threat: 48% of gross sales are from outdoors the US

How will we quantify, monitor, and observe such a fancy threat profile? By doing what massive establishments do.

Lengthy-Time period Threat Administration Evaluation: How Massive Establishments Measure Whole Threat Administration

DK makes use of S&P International’s world long-term risk-management rankings for our threat score.

• S&P has spent over 20 years perfecting their threat mannequin
• which is predicated on over 30 main threat classes, over 130 subcategories, and 1,000 particular person metrics
• 50% of metrics are trade particular
• this threat score has been included in each credit standing for many years

The DK threat score is predicated on the worldwide percentile of how an organization’s threat administration compares to eight,000 S&P-rated firms masking 90% of the world’s market cap.

CSCO scores a hundredth Percentile On International Lengthy-Time period Threat Administration

S&P’s threat administration scores consider issues like:

• provide chain administration
• disaster administration
• cyber-security
• privateness safety
• effectivity
• R&D effectivity
• innovation administration
• labor relations
• expertise retention
• employee coaching/expertise enchancment
• occupational well being & security
• buyer relationship administration
• enterprise ethics
• local weather technique adaptation
• sustainable agricultural practices
• company governance
• model administration

CSCO’s Lengthy-Time period Threat Administration Is The eighth Greatest In The Grasp Checklist 99th Percentile In The Grasp Checklist)

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(Supply: DK Analysis Terminal)

Cisco is among the many 80 firms S&P charges when it comes to long-term threat administration. If something can go unsuitable (and it all the time will), S&P is most assured that Cisco will be capable to adapt and overcome it efficiently.

A Fantastic Firm At A Good Value

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Cisco is traditionally price about 14X earnings and right now trades at 13X, 9.5X adjusted for money.

• non-public fairness offers in 2022 averaged 11.3X cash-adjusted earnings

In different phrases, Cisco is modestly undervalued, even by non-public fairness requirements.

Because of this, not like Intel, which presents a moderately underwhelming 8% return potential over the subsequent few years, Cisco presents market-beating return potential.

Cisco 2024 Consensus Whole Return Potential

Cisco presents barely higher short-term return potential than the S&P 500 and about 40% greater than Intel.

Cisco 2028 Consensus Whole Return Potential

Cisco presents about 80% five-year whole return potential, about 60% greater than the S&P 500.

Cisco Funding Resolution Rating

CSCO is a doubtlessly nicely above-market common, high-yield alternative for anybody comfy with its threat profile. Take a look at the way it compares to the S&P 500.

• 7% low cost to honest worth vs. 1% low cost S&P = 6% higher valuation
• 3.2% secure yield vs. 1.8% (about 2X larger and far safer)
• roughly 10.1% long-term annual return potential vs. 10.2% CAGR S&P
• equal risk-adjusted anticipated returns
• 70% larger earnings potential over 5 years

Backside Line: Conservative Revenue Buyers Ought to Keep away from Intel, However Cisco Is A Strong Alternative

Let me be clear: I am NOT calling the underside in INTC or CSCO (I am not a market-timer). Nor am I saying Intel won’t finally achieve its turnaround.

Extremely SWAN high quality does NOT imply “cannot fall onerous and quick in a bear market.”

Fundamentals are all that decide security and high quality, and my suggestions.

• over 30+ years, 97% of inventory returns are a perform of pure fundamentals, not luck
• within the quick time period; luck is 25X as highly effective as fundamentals
• in the long run, fundamentals are 33X as highly effective as luck

Whereas I can not predict the market within the quick time period, this is what I can inform you about CSCO and INTC.

Lengthy-Time period Consensus Return Potential

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(Supply: DK Analysis Terminal, FactSet, Morningstar, YCharts)

Intel is a good firm that spends huge sums of cash on R&D and development. In reality, nobody within the trade spends extra. However with regards to delivering on its chip roadmap and returns on that invested capital, it leaves a lot to be desired.

Intel is doubtlessly turning into the subsequent IBM, a continuously overpromising and underdelivering former innovation legend. One which for the subsequent few years, presents round 8% annual return potential.

Sure, the yield is enticing and certain secure for the foreseeable future. However Cisco is solely a:

• higher and extra worthwhile enterprise
• extra diversified
• has extra steady money circulate due to 43% subscription income
• superior profitability
• a superior AA-stable credit standing stability sheet
• superior long-term return potential (based mostly on the present consensus development outlooks)
• a hundredth percentile long-term threat administration

My concern is that Intel could be turning into like IBM. The trade chief in patents and hype however struggling 12 months after 12 months of poor execution and stagnant development.

In order for you distinctive dividend security and threat administration within the prime 1% of all firms on earth, in that case, Cisco is a high-yield tech utility that’s the superior option to Intel right now.