Intel: What Happens Now?
Contributor since 2011 / 23069 Followers
Summary:
- Intel has cut its dividend by two-thirds, a move which does not surprise me at all.
- In fact, such a move should perhaps have been announced earlier.
- Dividend investors do not like the move, creating a potential opportunity.
- With valuations down and the Mobileye stake getting more valuable, these could be interesting levels, albeit that conviction is lacking.
Justin Sullivan
In the final days of January, I concluded that Intel (NASDAQ:INTC) was off to a dreadful start to 2023. This came as the company had seen a very soft performance in the fourth quarter, while the first quarter outlook for 2023 was particularly underwhelming.
With few green shoots on the horizon, despite some upbeat commentary provided by management, I was cautious. This comes as the company needs huge net capital investments to revamp its competitive position, while the lack of current earnings and steep dividend commitments resulted in huge cash outflows.
Some Background
Intel’s woes started in the summer of 2020 when Intel announced a six-month delay in the product development roadmap for its 7nm product, giving its peer Advanced Micro Devices (AMD) a huge window of opportunity to take (even more) market share. This means that Intel’s problems and shares reverted ahead of the 2022 pullback seen in many technology and semiconductor names.
Early in 2021, Intel hired veteran Pat Gelsinger, who has now led the business for two years, to address the situation, but it was very clear that this was a very tough and lengthy turnaround process.
2020 sales still came in at $78 billion, on which the company posted earnings of $5.30 per share. Strong growth and a re-shoring of chips production under the CHIPS Act drove these results. 2021 sales rose a percent to $79 billion, with adjusted earnings down to $4.86 per share, still translating into a huge $20 billion profit number, with net debt reported at just $3 billion.
The weakness, as a result of slower growth and a worsening competitive positioning, was seen throughout 2022. First quarter sales fell 7% to $18.4 billion, with second quarter sales down 22% to $15.3 billion. Third quarter sales came in flattish (on a sequential basis) at $15.3 billion as the company announced plans to cut costs by $3 billion in 2023 and another $8-$10 billion through 2025. Fourth quarter sales fell to just $14.0 billion, coming in at the lower end of the guidance, with adjusted earnings only coming in at $0.10 per share while the company was posting GAAP losses.
This was problematic, certainly as the company only guided for first quarter sales of around $11 billion (at the midpoint), with adjusted losses seen at $0.15 per share. The issue is that the business faces huge cash outflows on top of these losses in the form of net capital investments and dividends. The first trend was around $10 billion a year, while the annual dividend payout came in around $6 billion, creating huge cash outflows, as net debt stood at $14 billion by the end of the fourth quarter.
Fortunately, the company held $6 billion in equity investments and its stake in Mobileye (MBLY) whose shares have only risen since the IPO, a company in which Intel still holds a 94% stake. At current levels of $41, Intel’s stake is valued at nearly $35 billion, creating quite some room to bring in cash flows over time.
Given the dismal outlook for the first quarter, I was more cautious at $28 than I was at similar levels back in November, as the first quarter sales guidance was utterly underwhelming. The deterioration in the sales and losses being reported made that I was turning very cautious, as perhaps a dividend cut might be a solution in the interest of preserving capital and creating shareholder value for investors in the long run (i.e., to avoid significant dilution).
An Update
The anticipated dividend cut arrived, perhaps sooner than anticipated, as the company announced a big cut in the dividend right now. On the 22nd of February, Intel provided an update on its long-term capital allocation strategy. A $0.365 per share quarterly dividend has been cut to $0.125 per share, a massive 66% reduction.
On top of the news, the company reconfirmed the outlook for the first quarter, both the sales and earnings guidance. Pat Gelsinger calls prudent capital allocation crucial to enable the IDM 2.0 strategy, with new product launches seen in 2023 and 2024. The company committed to its previously targeted cost savings estimates throughout 2025.
As expected, shares fell substantially in response to the dividend cut with shares down from $28 to $25, as a huge part of Intel’s investor group is in it for the dividend. The announcement made that many of these investors have sold the shares on the back of the news.
The cut makes that the annual dividend commitment falls from about $6 billion to $2 billion, giving the company quite some cash to address its issues, but it might indicate that the company does not expect a quick turnaround as well.
And Now?
The situation around Intel stock remains very tricky given the dismal fundamental performance, as frankly, I do not care that much about the dividend. Promising is that Mobileye is being awarded quite a valuation, proving a cash cow to milk by Intel to finance its net capital spending requirements in the coming years, despite the poor current momentum.
With end markets apparently showing a bit of stabilization, it is really up to the management to execute here. Frankly, I lack conviction to add on this dip here, with the fundamental challenges being time and time bigger than anticipated.
Disclosure: I/we have a beneficial long position in the shares of INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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