Intel Corporation (INTC) had not cut the dividend but had left it constant in the past. But rising competition and much weaker demand put Intel’s dividend in a tenuous position. In addition, the firm needed to reallocate capital to foundries, new chips, and acquisitions. These needs far outweighed paying a dividend.

Moreover, the stock price has been falling since early-2021, and the dividend yield was rising to a decade high. Although Intel could still pay the dividend, management’s priorities shifted to investing in the business and acquisitions. Hence, Intel (INTC) cut the dividend.

Overview of Intel Corporation (INTC)

Gordon Moore and Robert Noyce started Intel in 1968. The two were pioneers in the nascent semiconductor industry. Intel evolved into the world leader in microprocessors and semiconductors. The success of the x86 and the associated “Intel Inside” marketing campaign allowed Intel to achieve market dominance. Although that dominance is less than before, the company still designs and fabricates CPUs and chipsets for PCs, servers, mobile phones, vehicles, wireless products, networking products, field programmable gate arrays (FPGAs), etc. The leading brand names are Xeon, Core, Pentium, Celeron, Atom, Evo, Movidius, Iris, etc.

Today, Intel operates in three segments: Client Computing Group (CCG), Datcenter and AI Group (DCAI), and Network and Edge Group (NEX). In addition, Intel has smaller businesses in the Accelerated Computing Systems and Graphics Group (AXG), Mobileye, and Intel Foundry Services (IFS). The firm spun off Mobileye (MBLY) as a separate business in a ~$16.7 billion IPO and is investing heavily in foundries. In addition, Intel announced the acquisition of Tower Semiconductor (TSEM) to expand in this area.

Total revenue was $63,054 million in 2022 and the past twelve months.

Source: Intel Investor Relations

Dividend Cut Announcement

Intel cut its quarterly dividend by 65.8% on February 22, 2023. The company’s quarterly dividend was $0.365 per share. The new dividend rate is $0.125 per share. Expressly, the press release stated,

“The decision to decrease the quarterly dividend reflects the board’s deliberate approach to capital allocation and is designed to best position the company to create long-term value. The improved financial flexibility will support the critical investments needed to execute Intel’s transformation during this period of macroeconomic uncertainty. Since first initiated in 1992, Intel’s dividend has delivered more than $80 billion in cash returns to the company’s stockholders, and the board is committed to maintaining a competitive dividend.”

Furthermore, the CEO made clear the focus is delivering new and improved chips and manufacturing processes.

“Prudent allocation of our owners’ capital is important to enable our IDM 2.0 strategy and sustain our momentum as we rebuild our execution engine,” said Pat Gelsinger, CEO of Intel. “We remain on track to deliver five nodes in four years and continue to expand the IFS (Intel Foundry Services) customer base. We are well into the ramp of 13th Gen Intel® Core™ and 4th Gen Intel® Xeon® Scalable processors, and we look forward to the launch of Meteor Lake and Emerald Rapids in 2023 and Granite Rapids and Sierra Forest in 2024.”

Challenges

Intel’s challenges are intense, with increasing competition and a slowdown in PC and data server demand after the COVID-19 pandemic.

Competition

The semiconductor industry is becoming increasingly competitive. Twenty years ago, Intel was clearly the dominant chip company. Today, Intel faces competition from semiconductor companies but also former clients who design their own ARM-based chips and employ foundries to manufacture them.

Advanced Micro Devices (AMD) was trailing by the end of the dot-com boom. Intel was the clear market leader, but that supremacy has diminished. Under new and effective leadership, AMD can design its own chips with better performance and energy efficiency. In addition, manufacturing is outsourced to Taiwan Semiconductor Manufacturing Company (TSMC). Consequently, AMD has been taking market share from Intel. This result was evident in the revenue and operating margin deterioration comparing Q4 2021 and Q4 2022.

Next, former customers, like Apple (AAPL), have moved away from Intel chips. Instead, Apple has designed its own ARM-based computer chipsets and outsourced fabrication to TSMC. Previously the design and manufacturing of microprocessors and microchips were labor and capital-intensive business. However, the ascendency of chip foundries permits companies to focus on internal innovation and outsource manufacturing, avoiding building multi-billion fabs.

Smartphones have also changed the paradigm. Qualcomm (QCOM) and ARM are leaders in modem chips, a business Intel exited. In 2019, Intel sold its 5G modem business to Apple.

In addition, Intel is trying to compete in AI chips, a market in which Nvidia (NVDA) is the leader. But Intel did not develop this business internally. Instead, it acquired Nervana and Movidius in 2016 and Habana Labs in 2019. The path will be difficult because many others are competing in this space. For instance, Alphabet (GOOG, GOOGL) announced its AI chips, the Tensor Processing Unit (TPU), outperform Nvidia’s in operations per second and energy efficiency.

The bottom line is competition is heating up, and Intel’s current response could have been more effective.

Demand

The other concern is low demand after the COVID-19 pandemic. From 2020 to 2021, PC and data server demand rose because consumers bought desktops and laptops to work from home. However, this trend reversed in 2022. According to Gartner,

“Worldwide PC shipments totaled 65.3 million units in the fourth quarter of 2022, a 28.5% decrease from the fourth quarter of 2021.”

Moreover, demand is unlikely to recover until late-2023 at best. In fact, Intel forecasted a weak outlook because it expects the severe PC downturn to persist in 2023.

Dividend Safety

Intel’s dividend safety was excellent before 2022. But the severe and unprecedented downturn in PC demand combined with increasing competition weakened the safety. Currently, the company receives a dividend quality grade of F. After the cut, the score was still an F, and the dividend safety will struggle in 2023 unless demand and margins improve.

The payout ratio is now approximately 94% based on an annual dividend rate of $0.50 and consensus forward earnings of $0.53 per share. This value is well above our target of 65%. However, Intel expects a loss in the first quarter because of low PC demand.

The annual dividend now requires about $2,069.5 million ($0.50 yearly dividend x 4,137 million shares) compared to $5,997 million in 2022. But the dividend-to-FCF ratio will probably be negative in 2023 because of elevated capital expenditures and lower revenue.

The one bright spot is Intel’s balance sheet, although it has weakened. The firm has about $28,338 million in cash, equivalents, and short-term investments, offsetting $42,472 million in total debt. The leverage ratio is still under 1.0X, and interest coverage is almost 5.0X. But the credit rating agencies have assigned an A/A2 upper-medium investment grade credit rating. However, both S&P Global and Moody’s lowered their rating one notch in early-2023.

Overall, the cut improved dividend safety and coverage. But Intel is not yet out of the woods, and the possibility of a second cut exists.

Source: Portfolio Insight*

Final Thoughts on Intel (INTC) Dividend Cut

Intel’s problems are related to rising competition and weak demand. But the company also needed better leadership and capital allocation in the face of resurgent opponents and a changing marketplace. Along these lines, the new CEO has made progress.

Investors had sold Intel’s stock since April 2021 as the firm’s challenges mounted. Ultimately, Intel needed to cut the dividend to preserve capital, reinvest in its business, and make acquisitions.

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