Intel CEO Pat Gelsinger.
Ting Shen/Bloomberg
Under CEO Pat Gelsinger,
Intel
has committed to massively increasing its capital spending investments by tens of billions of dollars. But with a rapidly slowing global economy, repeated product delays, rising competitive threats, and political uncertainty, it might need more help to fund its ambitions.
One good place to find it would be
Intel
’s
(ticker: INTC) generous dividend payout. While the chip maker has paid a consistent dividend for three decades straight, it needs to do whatever it takes to shore up its future—up to and including cutting its dividend.
Intel stock closed Tuesday down 2.2%, at $37.78. It’s down 27% this year.
How did we get to this point? Just months ago, it seemed Gelsinger’s turnaround strategy of faster product iteration and foundry business expansion was on track.
In January, the company’s board increased its cash dividend by 5% to $1.46 per share on an annual basis, or roughly $6 billion in total. Despite inflationary pressures, management reaffirmed full-year guidance in April and predicted a rebound in PC sales for the back half of the year. The 2022 forecasts at the time included $76 billion in revenue, capital spending of $27 billion—up more than 40% compared with last year—and roughly $1.5 billion in negative free-cash-flow.
The guidance now appears unattainable. Earlier this month at an investor conference, Intel Chief Financial Officer David Zinsner said the macro environment and component supply issues were much worse than they had anticipated for the current quarter. His commentary, along with the increasing discounting activity at retailers, makes it likely the company will have to revise down its forecasts.
Intel declined to comment about the risks surrounding its full-year financial outlook. The company said in an emailed statement that it “remains committed to a healthy and growing dividend.”
One thing even more troubling than the business environment: Intel’s core product execution continues to falter. For years, the company has been losing share in the lucrative data-center server market. Its data-center unit generated about $26 billion in revenue for 2021—roughly flat year over year—while
AMD
’s
(
AMD
) data-center revenue more than doubled, thanks to its better-performing chips.
“We have seen AMD overtake Intel as a market leader in the most performance-conscious portions of the server CPU market,” Morgan Stanley analyst Joe Moore wrote in a note last week.
The latest developments suggest AMD could continue to pick up market share. A few weeks ago, Intel executive Sandra Rivera revealed the company’s next-generation Sapphire Rapids server processor would ramp up later than planned and admitted it may not outperform AMD’s next server chip, called Genoa.
On Monday, AMD CEO Lisa Su confirmed to Barron’s in a phone interview that Genoa is on track to launch later this year and expressed optimism about its market positioning against Sapphire Rapids. “The data center is the biggest bet for AMD,” she said. “We think Genoa is leadership from a performance [standpoint], performance per watt, and total cost of ownership. That’s what we’re hearing from our customers as well.”
Intel is stumbling in other product categories too. The company’s new graphics chip lineup has suffered from delays and doesn’t look competitive either. Techspot, a widely-read technology website, said that Intel’s graphics offering may be this year’s “most underwhelming hardware release,” citing its poor performance.
If you add up Intel’s product and economic woes, the company will soon have to make some difficult choices.
During the company’s February investor day, Zinsner said Intel plans to generate break-even free cash flow on the assumption of mid-to-high-single-digit revenue growth for 2023 and for 2024. Last Thursday, at Barron’s Investing in Tech Conference, he said the company’s capital spending plans are above $100 billion over the next five years. But if revenue comes in lower—which seems inevitable with Intel’s recent troubles—those cash projections will be off the mark unless there are budget reductions elsewhere. Something has to give.
Then there is the logjam in Congress. Last week, Intel pointedly told government officials the pace of its investment for its new multibillion-dollar manufacturing site in Ohio may be dialed down if the CHIPS Act—the legislation that includes $52 billion in incentives for domestic semiconductor production and research—doesn’t pass.
But before Intel alters its plans, the first thing on the chopping block should be its dividend. Simply put, the $6 billion a year Intel has slated for paying shareholders would be better used for R&D and growing or maintaining its capital-spending investments.
The numbers would be significant. By slashing the dividend for the next four years, Intel would have nearly $24 billion in extra capital to invest in innovation. By comparison,
Nvidia
(NVDA) spent $5.3 billion in total R&D last year.
Of course, there will be some income-oriented investors who may sell their Intel stock if it no longer pays a dividend. But at 11 times earnings, Wall Street isn’t giving Intel much of a premium for its shareholder return policy. And the chip maker can always restart a dividend once it returns to better profitability.
For now, Intel needs to accept its precarious reality and use every financial resource at its disposal instead of cutting expenditures. That means Intel’s dividend should end. It’s the prudent and right move.
Write to Tae Kim at [email protected]
