How I evaluate a stock - Example Intel

Someone recently asked me how I evalutate at stock. Here's my basic process. First of all I want to make money on a stock. I don't buy stock just for the fun of it. I buy with an expectation of a return. And my return horizon is less than 5 years.

  1. Am I familiar wiht the company? Have I read articles about the company over time (Example)? Is the company a major player in its industry sector?
  2. How do I expect to make money? Generally I expect to make money on both dividend returns and stock growth. I almost exclusively invest in dividend stocks.With Intel I expect to hold this for a long term and enjoy the dividend returns. 
  3. Do I expect growth? If not, I pass.
  4. What is the P/E ratio? Defined . Caveat: The P/E ratio looks at the last 4 quarters of profit. It is not forward looking. Generally I look for a P/E ration of less than 20. 
  5. What is the Dividend yield? In the case of INTC, it pays an annual dividend of $ .90 and the price of the stock is about $ 30. So the yield is .9 / 30 or 3%. 
  6. What is the Payout Ratio? INTC earned $ 1.87 per share over the last 4 quarters. That's a gross yield of 6%. The Payout Ratio is EPS / Dividend = 48%. If all of the earnings are paid out in dividends, it means that nothing is kept back for R&D. Not a good thing. A company with an unprofitable quarter may have a Payout Ratio of greater than 100%. They may be able to sustain that for a few quarters but not over the long term. 
  7. What is the Enterprise Multiple? This topic is a bit complex so click through to my longer blog post. I look for an Enterprise Multiple of less than 11.
  8. How does the stock compare to the company's competitors? finance.yahoo.com is my go-to website for all of this information. 
Conclusion: Intel is a buy for me. We currently have holdings in INTC. We are not adding to that at this time.

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