Intel (INTC 1.16%) is a member of the Dow Jones Industrial index, and the company finds itself at a critical juncture following a headline-grabbing 2020. The microchip giant has endured operational challenges and two steep drops in share prices, which has resulted in a new CEO taking the reigns in the hopes of executing a strategic turnaround for investors. This could deliver a nice bump for Intel shareholders over the next one or two years, but even that potential growth might not make this a better buy than simply holding the entire Dow Jones.
Index investing can be a great way to diversify and reduce risk, but it usually means sacrificing some upside potential available through individual growth stocks. Investors who are considering Intel over the whole Dow Jones need to determine if Intel’s upside potential is large enough to ignore the reduced risk and volatility provided by a more diversified index.
Intel at a crossroads
Intel had an eventful year in 2020, with operational challenges and shake-ups that attracted investor interest. The company has experienced erosion of its once-dominant market leadership, with smaller competitors including a resurgent AMD (AMD -1.35%) gaining ground. Intel is also dealing with major customers such as Apple (NASDAQ: AAPL) and Microsoft (MSFT -0.78%) starting to design microchips in house.
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In July, the company disappointed investors by announcing that its upcoming release of 7-nanometer chips would be delayed by a full year. The semiconductor industry is highly competitive and had previously struggled to keep pace with its peers in the prior generation of 10-nanometer chips. Being a laggard in the rollout of next-generation chips not only hurts sales, but it also impacts pricing and profit margins in such a competitive environment. That news caused shares to fall 20% in July.
The trouble continued in October after Intel reported mixed results with worrisome commentary. The company exceeded sales expectations and raised its guidance, but it fell short on GAAP profits, and there was a major drop in demand among data center customers. After two big sell-offs, activist investors from the hedge fund Third Point stepped in and demanded changes from Intel’s management to fix the ongoing problems that have plagued the semiconductor giant. Activist involvement led to a new CEO taking over, and investors will hope that Intel can claw back some of its market dominance that’s eroded recently.
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After all that, Intel’s valuation is relatively cheap for any optimistic investors. The stock trades at a forward PE ratio of 12.3, which is fairly low in the current market. An enterprise value to EBITDA ratio of only 6.4 is also attractive. That indicates that there’s room for the stock to appreciate, but it looks less enticing for income investors. Intel’s 2.3% dividend yield is mediocre, and that’s especially relevant for a mature, low-growth company like this one.
Diversification without sacrificing growth
Owning an index rather than a single stock comes with benefits and disadvantages. Diversification dilutes the risk that any one company will falter and drag down the entire portfolio, so owning a large number of stocks is good for reducing volatility. However, this also puts a cap on how much your investments can grow; a group of 30 stocks will never have the upside potential that one stock can.
Intel might outperform the market if the current strategic turnaround successfully reestablishes the company’s market dominance. However, Intel isn’t likely to generate huge returns for investors through rapid sales or earnings growth. In this case, owning the other 29 stocks in the Dow Jones Industrial Index probably won’t limit portfolio growth relative to Intel, but it will greatly reduce risk and volatility. The Dow is spread out across numerous sectors, and it still provides plenty of exposure to growth areas such as the tech sector, pharmaceuticals, and consumer cyclical stocks. Moreover, investors can use ETFs such as the SPDR Dow Jones Industrial Average ETF Trust (DIA -0.06%) to easily buy the whole index and receive a 1.8% distribution yield, not too far below Intel’s dividend yield.
It’s hard to identify a clear advantage that Intel shares have over a portfolio of all 30 Dow Jones stocks, but the index provides an undeniable edge in risk reduction.
