Why This High-Yielding Tech Company Could Grow Tremendously

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The words "tech" and "high-yield" don't usually go together, but if you look hard enough there are exceptions. The problem is that those tech companies that do offer high dividends -- let's say 3% or higher -- generally have limited growth potential. When they do have that potential, it offers a rare combination that can make for great long-term capital appreciation. One example is Intel , which offers a yield of above 4% and is trading at a discount due to general pessimism surrounding its industry. 

The PC business today and why it's not that bad
With the dramatic growth in smartphone and tablet sales over the past couple of years, the fate of the traditional PC has been called into question. In fact, more smartphones than PCs are expected to be sold worldwide this year. Although global smartphone and tablet sales are widely expected to continue to grow at a rapid pace, these devices are not expected to take the place of PCs (including desktops and laptops) anytime soon. 

There will be a market for PCs for years to come, and while it will lose market share to tablets in terms of percentage of sales, sales of PCs are projected to grow in terms of the number of units shipped. In fact, including both desktop and laptop PC's, total units shipped are expected to climb from 322 million in 2013 to 333 million in 2017. PCs are still the most practical solution for such end markets as education, enterprises, and government users. PCs are still the most cost-effective way to get the most computing power, as well as the most storage capacity. In fact, one recent study estimates that global PC sales will rise from approximately 400 million currently to about 500 million by 2016.


Intel's dominance
While microprocessors only make up about one-fifth of the semiconductor sector's sales, there are only two companies that really compete within the space, Intel and Advanced Micro Devices . After a couple decades of battling for market share, Intel seems to be the clear winner, now shipping about 75% of the microprocessors sold worldwide. 

AMD's PC microprocessor market share peaked at about 50% in 2006 due to its lower prices and products that were on-par with their Intel counterparts. However, since that time, Intel has made tremendous efforts to improve its efficiency in terms of its manufacturing and cost structure, and more importantly, has improved its product development to ensure that it offers the best processors in the market for the price.

Lately, AMD has struggled to keep its microprocessor market share, and has undergone a few rounds of downsizing, having laid off about 10% of its workforce in 2011 and an additional 15% last year. Even with a low market share, AMD remains a threat to Intel, especially in the lower-end PC and server markets

Future possibilities: It's all about mobile
Intel's dominance in the PC business should sustain its revenues for years to come. On the other hand, in order to experience significant growth, the company will have to have some success in mobile processing. 

Intel's latest major venture into the space is already under way, with the company getting set to begin shipping its first multimode LTE chips, which aim to support 15 LTE bands and consume more than 20% less power than the competitors' similar chips. Once Intel works out the kinks with this type of product, it will be the key to getting Intel processors in handheld devices operating on U.S. networks (this has been the major reason why the company's processors aren't already in handheld devices).

One potential game-changing possibility is if Apple  decides to use Intel for its processing needs in the iPhone, iPad, or both. The two companies already have an excellent working relationship, and an Intel-powered iPad Mini, for example, could be viewed as even more of a premium product than it already is. 

Intel is unanimously recognized as the microprocessor leader throughout the world, and would add to the perceived value of Apple's products. Of the 30 highest-performing microprocessors on the market today, 28 are made by Intel. As far as the pricing power that comes with their reputation is concerned, just take a look at average price of a PC with and without an Intel processor. If it turns out that Intel can deliver competitive mobile processors, this is actually a very likely scenario, as it would be a win-win for both companies.

This potential deal has been rumored for some time now, and it has been reported that Intel and Apple have been in talks for Intel to take over Apple's A series mobile processors. Most Apple followers would agree that Apple needs to reduce its dependence on Samsung, and using Intel for its mobile processing needs would be the best way to do it.

Final thoughts
Intel's core market (PCs) is not going anywhere, and while it may lose overall computing market share percentage-wise, the number of PCs sold is actually expected to rise over the next several years. Also, when looking at Intel's current $53 billion annual revenue stream (without significant mobile processing revenue) and imagine the possibilities in Intel were to capture a sizable chunk of the smartphone market which is expected to ship 2 billion units annually by 2016.

Intel's 4% dividend yield makes it a rare combination of growth potential and current income that is rarely seen in the tech sector, and it is certainly worthy of consideration for any portfolio.

 

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The article Why This High-Yielding Tech Company Could Grow Tremendously originally appeared on Fool.com.

Matthew Frankel owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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