Dividend Safety Analysis: Intel (INTC). Intel is a global leader in designing and manufacturing microchips. The company has maintained its dominance through R&D, manufacturing advances, and solid relationships for years. But recently, Intel has been challenged with unprecedented competition, customers conducting their own chip design, and operational missteps.

The firm performed well during the COVID-19 pandemic. Businesses and consumers purchased computers, servers, and other items to facilitate working from home. But since early 2021, Intel’s stock price has declined to the lowest value since 2015, and simultaneously its dividend yield has skyrocketed to over 5%, the highest in the past decade. As a result, investors following a dividend growth strategy are asking themselves if Intel’s dividend is safe.

Overview of Intel

Intel was founded in 1968 by Gordon Moore and Robert Noyce, semiconductor pioneers. Today, it is the global leader in microprocessors and microchips. The company focuses on designing and fabricating CPUs and chipsets for PCs, servers, mobile phones, vehicles, wireless products, networking products, field programmable gate arrays (FPGAs), etc.

Intel’s renowned x86 chip allowed the firm to achieve 85%+ market share of CPUs for PCs and servers. Today, its products are sold under the Xeon, Core, Pentium, Celeron, Atom, Evo, Movidius, Iris, and other brand names.

Total revenue was $79,024 million in 2021 and $69,540 million in the last twelve months.

Source: Intel Website

Growth

Intel has grown organically through significant expenditures on R&D, allowing the company to gain dominance by improving the performance of its semiconductors and CPUs. As a result, the company has successfully increased sales and market share by producing faster chips that consume less power. Intel has also successfully deployed smaller process technologies following Moore’s Law and established cost advantages in manufacturing.

Also, Intel has grown through acquisitions of both large and small companies. Of note, the company bought Altera in 2015 for FPGA technology, followed by Nervana, and Movidius in 2016 for AI chips. Intel purchased Mobileye in 2017 for automotive vision chips and Habana Labs in 2019 for AI chips. 

More recently, the company announced the acquisition of Tower Semiconductor (TSEM) to expand its Foundry Services business.

Intel also divests business lines reshaping its portfolio. Intel sold its 5G Modem business to Apple (AAPL) in 2019. The company developed 3D NAND and 3D Xpoint products and sold the business to SK Hynix for $9 billion in 2021. Intel is now spinning out a percentage of Mobileye Global (MBLY) in an IPO valued at about $16.7 billion. 

Intel’s Dividend and Dividend Safety

Dividend Yield

Intel has paid a dividend going back to 1992. Today, the dividend yield is ~5.18%, near its recent high and almost double the 5-year average of 2.67%. It is also more than three times the S&P 500 Index’s average dividend yield. The forward dividend rate is $1.46 per share.

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Source: Portfolio Insight*

Dividend Growth

Intel is a dividend growth stock that has raised the dividend for eight consecutive years, making the company a Dividend Challenger. The company last announced a quarterly dividend increase to $0.365 per share from $0.347 per share on January 26, 2022. Investors ought to expect another dividend increase in early 2023. Intel’s dividend growth rates are roughly 6.0% in the trailing five years and ten years.

(Click on image to enlarge)

Source: Portfolio Insight*

Dividend Safety

In addition, Intel has acceptable dividend safety marks from the perspective of earnings, free cash flow (FCF), and the balance sheet.

The forward payout ratio is approximately 74%, based on an annual dividend of $1.46 per share and non-GAAP earnings per share of $1.96. This value is high relative to our target value of 65% suggesting the dividend has some risk. But Intel is going through changes, and 2022 will be challenging. In 2021, the payout ratio was a modest 25% suggesting the dividend was safe.

Intel’s dividend required $5,901 million in the past twelve months. Intel generated $13,668 million in operating cash flow (OCF), lower than usual due to a demanding environment. Furthermore, Intel has increased capital expenditures to build its Fabrication Services business. Hence, FCF has been negative at (-$13,315 million) in the past twelve months suggesting the dividend is unsafe. However, the firm is in transition, and it is unlikely the dividend will be cut, although raises may be limited.

Intel has a conservative balance sheet. At the end of Q3 2022, the company had ~$22,599 million in cash, cash equivalents, short-term investments, and trading securities. Short-term debt was $2,283 million, current long-term debt was $2,283 million, and long-term debt was $37,240 million. Debt is not a risk for the dividend with the leverage ratio at 0.73X and interest coverage of more than 16X. The credit rating agencies seemingly agree with an A+/A1 upper-medium investment grade credit rating.

Competitive Advantages and Risks

Intel’s advantages include market leadership in microprocessors for PCs and data center servers. The company’s lead extends to its internal design and manufacturing process, matched only by a few companies. Intel possesses scale and cost efficiencies few other chip manufacturers can match. That said, the company is behind Taiwan Semiconductor Manufacturing Company (TSM) on implementing the 7 nm process.

Other chip designers often avoid building capital-intensive fabrication facilities and outsource to companies like TSM, Samsung Electronics, and GlobalFoundries (GFS). Intel’s scale and cash flow permit it to invest in fabs when other companies cannot. Lastly, Intel’s balance sheet is conservative, giving it flexibility for acquisitions and capital expenditures unmatched by competitors.

Intel’s former dominance is waning a bit. The smartphone undermined Intel’s hold on microprocessors, CPUs, and chips. Companies like ARM and Qualcomm (QCOM) are market leaders in cell phone and modem chips. Additionally, Nvidia (NVDA) is the market leader in graphics chips. AMD (AMD) is increasingly competitive in data servers and is taking market share because of its partnership with TSM.

Lastly, customers like Apple (AAPL) are creating their own chipsets based on ARM designs. In addition, Amazon (AMZN) and Alphabet (GOOG) are also trying ARM-based designs in their data centers.

Final Thoughts on Intel’s Dividend Safety

The semiconductor business is cyclical, with swings in demand. Sales are also down across the industry in 2022. Consequently, the firm is cutting headcount and expenses. Next, Intel is faced with challenges and is spending more to expand its Fabrication Services business to serve customers designing their own chips. Lastly, Intel must execute better to catch TSM in the 7 nm process. Intel may not cut its dividend in the near future, but it has left it constant in the past. 

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