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Why Intel’s free cash flow supports dividends and share buybacks

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Technology sector has rewarded its shareholders with increased dividends and buybacks

The year 2014 saw the biggest buyback announcements come from leading corporations including Apple Inc. (AAPL), Intel Corporation (INTC), Wells Fargo & Co (WFC), Caterpillar Inc. (CAT), and Monsanto Company (MON). Each of these buybacks totaled $10 billion or more. Overall, 2014 buybacks are expected to be the best since 2007 and 2013.

buybacks

Intel’s dividends and share buybacks

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In its 3Q14 results, Intel announced dividends of $1.1 billion and $4.2 billion to be used to repurchase 122 million Intel’s shares. In July 2014, Intel announced the expansion of its capital return program by adding $20 billion to its buyback authorization. The chart below shows the dividend and free cash flow per share of Intel.

Cash and cash flows

In 2013, Intel’s free cash flow stood at ~$10 billion. For 3Q2014, cash and cash equivalents, debt, and free cash flow stood at $3.14 billion, $13.27 billion, and $3.25 billion, respectively. Intel’s strong cash flow generation allows it to hold significant cash on its balance sheets, invest in new product areas as seen previously in this series, and increase shareholder distributions.

dividend buybacks

As the above chart shows, Intel has not increased its payout in two years. Intel’s sluggish growth in recent years has weighed on its historical dividend growth rate. Apart from spending cash to pay dividends, Intel has aggressively bought back its own shares.

A natural concern about Intel’s massive buyback is that it won’t have enough funds left to support its own growth activities. Meanwhile, the stability in the PC market and the robust growth in the data center segment allowed Intel to post decent quarterly figures.

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