The Dividend Cushion ratio is one of the most powerful financial tools an income or dividend growth investor can use in conjunction with qualitative dividend analysis. The ratio is one-of-a-kind in that it is both free-cash-flow based and forward looking. Since its creation in 2012, the Dividend Cushion ratio has forewarned readers of approximately 50 dividend cuts. We estimate its efficacy at ~90%.
By Brian Nelson, CFA
As noted in our brief note on Intel this morning, “Intel Cuts Dividend, As Expected,” we have now refreshed the company’s reports on the website, with updated Dividend Safety and Dividend Growth Potential ratings, both as VERY POOR. After factoring in Intel’s updated outlook to our valuation model from its fourth-quarter release, our updated fair value estimate is now $25 per share (was $27 per share) and our updated Dividend Cushion ratio is -1.7 (negative 1.7), was 0.4. This includes the dividend cut.
Intel Was Removed from the Simulated Newsletter Portfolios in 2020
At Valuentum, we are always trying to do the best job we can communicating our thoughts clearly to members, but sometimes we can come up short. As it relates to Intel’s analytical story arc, it has been more than two years ago, on October 28, 2020, that we removed Intel from the newsletter portfolios in the mid-$40s (shares of Intel are now trading in the mid-$20s), “ALERT: Removing Intel (INTC) from the Newsletter Portfolios.”
Once a company is removed from the simulated newsletter portfolios, it is no longer viewed as one of our best ideas.
On October 28, 2020, a few years ago, we noted that: “…competitive pressures and a balance sheet that sports a growing net debt position make (Intel) much less attractive of a stock, in our view. We tend to prefer healthier balance sheets in this environment, namely ones with huge net cash positions.” Here was that email.
We Highlighted That Intel’s Dividend Could Be on the Chopping Block Last Month
In a recent note January 28, 2023 on our website, “We Don’t Think Intel Will Spoil the Tech Rally,” we emphasized that the “big story with Intel is its deteriorating free cash flow, and the threat it may pose to its dividend” and that the “big question is just how bad cash burn will be at Intel in the next few years.”
We became extremely skeptical of Intel’s dividend health after it reported fourth-quarter results in late January, a sharp and material change from mixed commentary in Intel’s stock and dividend report that was published about a month prior to that January 28 note.
Also on January 28, 2023, on Seeking Alpha, we wrote the following note, “2 Stocks With ~5% Dividend Yields Worth Avoiding.” In that note on Seeking Alpha, we included Intel as one of the stocks “whose dividends could face pressure in the years ahead” and as one of two companies “potentially at risk of a dividend cut in the coming years.”
Here’s more from that note on Seeking Alpha from January 28, 2023:
We’ll have to see how things shake out during 2023, but if Intel plans to continue to spend aggressively, we could see the company seek to shore up its balance sheet by cutting the dividend at some point. Intel’s outlook for the first quarter of 2023 came in far below consensus estimates, and investors have good reason to be concerned. Intel’s dividend could end up on the chopping block before we know it (January 28, 2023).
It was in this context that we wrote our brief note on Intel this morning, with its Dividend Cushion ratio of 0.4 (any ratio below 1 generally signals increased risk to the payout). Though we removed Intel from the simulated newsletter portfolios years ago and while we commented about how we didn’t like its dividend subsequent to its latest report and ratings on our website, the ratings and commentary in the prior stock report and on our website didn’t fully reflect our heightened concerns with respect to the payout that manifested in the past month–and that were emphasized in our late January writings, both on our website and on Seeking Alpha.
Be Sure to Read Through the Latest Article Commentary That May Be More Recent Than the Latest Report
These situations where the reports may not reflect our very latest thoughts can sometimes happen when things are fast-changing over a matter of weeks from when we update a stock and dividend report, as in early January, to when a company reports in late January that may cause a change in sentiment/opinion to when a company makes a major corporate move such as a dividend cut in February (all during the same earnings season), as in what happened to Intel. We will strive to do the best job we can communicating our thoughts as clearly as possible under these fast-changing circumstances.
As a reminder, please be sure to always read through our latest thoughts in the article commentary, which may be subsequent to the date of the latest report publishing. The latest article commentary on each firm’s stock page may include interim changes in sentiment, potential valuation changes, updated thoughts on dividend health that may occur between report updates, as not all of our latest thoughts can be incorporated immediately into the stock and dividend reports until the reports are updated for new information at a later date. With all this said, we have now refreshed our stock and dividend reports on Intel, and we expect to further fine-tune our valuation model of the chip giant to reflect its recently filed 10-K in accordance with our next refresh for tech stocks.
We don’t expect situations like this to occur frequently or again. The vast majority of the time, the story arc on dividend cuts is not as convoluted as Intel’s path, and the example of Rio Tinto (RIO), which slashed its payout today, is a good example of this. In Rio Tinto’s case, prior to its dividend cut today, the company’s Dividend Cushion ratio was 0.7, and it had Dividend Safety and Dividend Growth Potential ratings of POOR and VERY POOR, respectively. We expect to update our reports on Rio Tinto soon. Many thanks for your continued interest in our services, and we continue to be impressed with how well the Dividend Cushion ratio continues to flag heightened dividend risks across our coverage.
NOW READ: Efficacy of the Dividend Cushion Ratio
Tickerized for INTC, AMD, ASML, NVDA, QQQ, RSP, SPY, TSM, TXN, LRCX, KLAC, RIO
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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