Intel (INTC) has paid uninterrupted dividends since making its first payment in 1992, and income investors have enjoyed 10% annualized payout growth from the company over the past decade.

Intel has long been one of the most dominant and pervasive technology companies in the world, essentially operating as a monopoly in its core computer and data center markets.

While Intel has numerous competitive advantages that are hard to replicate and a very healthy dividend profile, it must contend with the fast-moving nature of the technology sector, especially in its core market of personal computers.

Let’s take a closer look at Intel’s business to understand if its competitive advantages position the company to continue paying uninterrupted dividends well into the future, or if the business could turn out to be more of a value trap like other technology giants such International Business Machines (IBM), which is in Warren Buffett’s dividend portfolio here.

Business Overview

Intel was incorporated in 1968 and is the largest manufacturer of semiconductor chips in the world. Intel’s primary products are microprocessors and chipsets.

A microprocessor acts as the brain of computers and many other electronic devices (e.g. servers, tablets, phones, wearable devices). It essentially controls and manages what a computer does by handling communications between the processor, memory, and other components.

A chipset consists of numerous electronic components that help manage the flow of data within an electronic device (e.g. between the mouse, keyboard, monitor, and hard drive; help balances the performance of a system).

The microprocessor and chipset are arguably the two most important factors that impact the performance and functionality of personal computers (PCs).

Intel’s customers are primarily equipment manufacturers in the computing and communications industries.

Desktop and notebook computers accounted for 55% of Intel’s sales last year but have been shrinking as a percentage of overall mix as PC demand continues to gradually decrease in favor of tablets and smartphones.

The remaining 45% of Intel’s business comes from data center processors (close to 29% of Intel’s overall sales), flash memory chips used for computer storage needs, and other chips that improve the computing performance of electronics in cars and other devices and equipment, including many Internet of Things applications.

These businesses are enjoying strong growth, driven largely by double-digit gains in data-centric businesses. Importantly, chips used in servers are much more profitable than those used in PCs.

As a result, Intel’s operating profits are split almost evenly between its PC business and all of its other operations, led by data center processors.

Business Analysis

Intel’s microprocessors are used in over 80% of global PCs sold each year, according to Bloomberg, and the company has more than 90% market share in the data center microprocessor market.

How has Intel amassed such a dominant share in these huge markets?

Simply put, Intel has consistently invested to maintain the most advanced manufacturing process in the world, enabling it to deliver the best performance and value proposition to customers.

Developing and manufacturing microprocessors is extremely complex and capital intensive.

The manufacturing process requires hundreds of steps in “cleanrooms,” which, microprocessor, contain air which is 1,000 times cleaner than a hospital’s operation theater. Building a single plant costs roughly $5 billion today and will only increase in cost going forward.

Research and development costs are also astronomical in the semiconductor manufacturing industry. Intel spent more than $12.7 billion on R&D in 2016, representing about 22% of its total sales, for example.

To maintain its technological lead, Intel must constantly invest in cutting-edge processes to improve the performance and value of its chips.

The company expects capital spending to total $12 billion in 2017, and Intel has spent more than $170 billion on R&D and capital expenditures since 2005.

Not surprisingly, there are very high barriers to entry in this industry. The cost of developing valuable intellectual property and building out competitive production facilities is enormous, especially when the bulk of customers are already dependent on Intel’s chips.

Intel’s investments have allowed it to consistently introduce the next generation of process technology every two to three years, improving the performance of its chips at a breakneck pace that competitors cannot afford to keep up with.

Intel is also one of the few semiconductor companies that manufacture products using their own facilities (most semiconductor businesses design their chips and outsource manufacturing to save costs and generate more predictable cash flow).

As a result of its scale and vertical integration, Intel exerts more control over its performance optimization and can introduce new products to the market at a faster pace.

With costs to build leading-edge manufacturing facilities rising (it becomes increasingly difficult to build smaller chips), fewer companies are able to compete with Intel’s advancements in performance, energy efficiency, and cost.

In addition to spending on manufacturing plants and R&D, competitors and new entrants must contend with the strong reputation of Intel’s brand, which recently ranked as the world’s 14th most valuable brand.

Altogether, Intel’s economies of scale, leading technology portfolio, and cutting-edge manufacturing processes have created a powerful ecosystem with high switching costs for customers.

Intel’s architecture has been refined for decades, and the company has funneled well over $100 billion dollars to continue improving it.

As the incumbent technology in PCs and data centers, Intel’s processors have effectively locked up customers.

For example, when Dell develops a new computer, there is no compelling incentive to switch to a different processor family as long as the previous version worked and the next one offered by Intel is even better. Many legacy applications run on Intel’s technology, and switching would be costly in many cases.