Is Intel's (INTC) Dividend Safe? For Now, but Turnaround Remains Challenging as PC Demand Plunges
The personal computer (PC) market experienced its sharpest decline in over two decades during the third quarter with shipments plunging 20%, according to an October 10 report from Gartner.
Intel generates around half of its sales from microprocessors, chipsets, and other products used in computers. Management previously expected a 10% decline in overall PC sales this year.
However, the latest data from Gartner and a recent PC-driven guidance reduction from rival AMD suggest the chip maker may need to lower its financial forecast again when it reports third-quarter earnings on October 27.
Given the magnitude of deterioration in the PC market and its potential impact on Intel's cash flow during a period of heavy capital spending, we are downgrading the firm's Dividend Safety Score to a lower level within our Safe bucket.
As we discussed in July, Intel remains in the early innings of a capital-intensive turnaround plan intended to regain its technological lead against rival foundries.
Intel's capital spending over the next few years will exceed the firm's historical norm by 50% or more as money is poured into expanding production, constructing new chip factories, and equipping current sites with advanced manufacturing technologies.
As of July, Intel expected 2022 capital expenditures to total $23 billion, down from $27 billion previously. The dividend costs another $6 billion annually, and operating cash flow was projected at just $21 billion for the year.
In other words, Intel will burn through about $8 billion of cash this year based on management's latest guidance. This will mark the chip maker's first free cash flow deficit in at least 20 years.
Intel's cash flow deficit could increase by a couple billion dollars in the near term if PC demand faces a prolonged decline and enterprise spending on servers slows alongside the economy.
Some companies would consider cutting or suspending their dividends in this environment to preserve cash.
But for now, Intel still has the desire and ability to defend its payout even though the current demand environment reduces the firm's margin of safety.
The biggest point of strength is the capital commitments Intel has received to share the steep cost of its manufacturing build-out.
In addition to the U.S. and European Union's legislation to increase spending on semiconductors, Intel in August reached a deal with Brookfield to fund $15 billion of its future capital expenditures.
While Intel gives up some of the long-term upside from its investments with this deal, the firm also improves its free cash flow profile over the next few years and reduces risk.
Intel can generate additional cash from taking Mobileye public. The developer of chips and camera-based software for autonomous driving was acquired by Intel in 2017 for $15 billion and is expected be valued at $30 billion, according to Bloomberg.
Selling part of its Mobileye stake would further bolster Intel's $27.5 billion of cash and investments held at the end of last quarter.
This strong liquidity position will help Intel get through a few capital-intensive years that could cause the chip maker's A+ credit rating to be downgraded as leverage ticks up from very low levels.
Overall, 2023 will be a transition year for Intel given PC market headwinds and the amount of time and money required for the firm's investments and chip-making process changes to bear fruit.
We expect Intel to announce a token dividend raise in January, but the payout's long-term safety hinges on Intel restoring its technological leadership position.
The stakes are high, and Intel would likely become a value trap if its investments fail to stem the market share losses it has experienced in recent years.
If we lose more confidence in Intel's ability to defend its leading market share in processors and chipsets used in PCs and servers, we would likely downgrade the company's Dividend Safety Score again.
For now, Intel remains a "show me" story with investors and likely won't be able to demonstrate the success of its investments until 2024.
Valuation expectations continue to appear low for a business that makes essential products and serves as a hedge against conflict in Taiwan as some companies think about reducing their dependence on foreign chip supplies.
But investors must be willing to bet that Intel can stop bleeding market share in the years ahead, a difficult assessment to make in the dynamic tech sector.
Intel generates around half of its sales from microprocessors, chipsets, and other products used in computers. Management previously expected a 10% decline in overall PC sales this year.
However, the latest data from Gartner and a recent PC-driven guidance reduction from rival AMD suggest the chip maker may need to lower its financial forecast again when it reports third-quarter earnings on October 27.
Given the magnitude of deterioration in the PC market and its potential impact on Intel's cash flow during a period of heavy capital spending, we are downgrading the firm's Dividend Safety Score to a lower level within our Safe bucket.
As we discussed in July, Intel remains in the early innings of a capital-intensive turnaround plan intended to regain its technological lead against rival foundries.
Intel's capital spending over the next few years will exceed the firm's historical norm by 50% or more as money is poured into expanding production, constructing new chip factories, and equipping current sites with advanced manufacturing technologies.
As of July, Intel expected 2022 capital expenditures to total $23 billion, down from $27 billion previously. The dividend costs another $6 billion annually, and operating cash flow was projected at just $21 billion for the year.
In other words, Intel will burn through about $8 billion of cash this year based on management's latest guidance. This will mark the chip maker's first free cash flow deficit in at least 20 years.
Intel's cash flow deficit could increase by a couple billion dollars in the near term if PC demand faces a prolonged decline and enterprise spending on servers slows alongside the economy.
Some companies would consider cutting or suspending their dividends in this environment to preserve cash.
But for now, Intel still has the desire and ability to defend its payout even though the current demand environment reduces the firm's margin of safety.
The biggest point of strength is the capital commitments Intel has received to share the steep cost of its manufacturing build-out.
In addition to the U.S. and European Union's legislation to increase spending on semiconductors, Intel in August reached a deal with Brookfield to fund $15 billion of its future capital expenditures.
While Intel gives up some of the long-term upside from its investments with this deal, the firm also improves its free cash flow profile over the next few years and reduces risk.
Intel can generate additional cash from taking Mobileye public. The developer of chips and camera-based software for autonomous driving was acquired by Intel in 2017 for $15 billion and is expected be valued at $30 billion, according to Bloomberg.
Selling part of its Mobileye stake would further bolster Intel's $27.5 billion of cash and investments held at the end of last quarter.
This strong liquidity position will help Intel get through a few capital-intensive years that could cause the chip maker's A+ credit rating to be downgraded as leverage ticks up from very low levels.
Overall, 2023 will be a transition year for Intel given PC market headwinds and the amount of time and money required for the firm's investments and chip-making process changes to bear fruit.
We expect Intel to announce a token dividend raise in January, but the payout's long-term safety hinges on Intel restoring its technological leadership position.
The stakes are high, and Intel would likely become a value trap if its investments fail to stem the market share losses it has experienced in recent years.
If we lose more confidence in Intel's ability to defend its leading market share in processors and chipsets used in PCs and servers, we would likely downgrade the company's Dividend Safety Score again.
For now, Intel remains a "show me" story with investors and likely won't be able to demonstrate the success of its investments until 2024.
Valuation expectations continue to appear low for a business that makes essential products and serves as a hedge against conflict in Taiwan as some companies think about reducing their dependence on foreign chip supplies.
But investors must be willing to bet that Intel can stop bleeding market share in the years ahead, a difficult assessment to make in the dynamic tech sector.
