Image Source: Aaron Fulkerson
By Brian Nelson, CFA
The Dividend Cushion ratio caught another dividend cut. This time it was Intel’s (INTC). With a Dividend Cushion ratio of 0.4, Intel announced February 22 that it has slashed its dividend by nearly two thirds, to $0.125 on a quarterly basis, down from its prior quarterly dividend of $0.365. The company’s estimated forward yield now stands at ~1.9%, and we can’t say that the dividend cut was unexpected given its massive net debt position and significantly weakened free cash flow generation–the two most important components behind an assessment of its cash-based intrinsic value and dividend health. Intel’s fourth-quarter results and outlook for 2023, released January 26, were atrocious. Here’s what we wrote after the release back in January:
Intel’s fourth-quarter results, released January 26, were nothing short of a disaster. The chip maker’s revenue dropped 32% on a year-over-year basis in the quarter, as its earnings per share dipped into negative territory. The big story with Intel is its deteriorating free cash flow, and the threat that it may pose to its dividend. Though the firm generated $3.1 billion in adjusted free cash flow for the three months ended December 31, 2022, the market remains laser-focused on its full-year performance. GAAP cash flow from operations for the year was $15.4 billion on the year, but net additions to property, plant and equipment of $23.7 billion were staggering, driving adjusted free cash on the year to -$4.1 billion (negative $4.1 billion).
Intel paid ~$6 billion in dividends during the past year, meaning that the chip giant burned through more than $10 billion in cash during 2022. This is no small thing either, as Intel’s balance sheet is no longer as strong as it once was. At the end of 2022, Intel had $37.7 billion in debt and $4.37 billion in short-term debt against cash and equivalents of $11.1 billion and short-term investments of $17.2 billion, so Intel has a rather large net debt position. Management plans to cut as much as $8-$10 billion in costs by the end of 2025, and we think the cost savings will be absolutely necessary, given the trajectory of its business. For the first quarter of 2023, Intel’s non-GAAP revenue is targeted in the range of $10.5-$11.5 billion, down 40% on a year-over-year basis, while it estimates it will lose $0.15 in non-GAAP earnings.
Image Source: Intel
Prior to Intel’s fourth-quarter earnings release, consensus had been for the company to earn $0.25 per share on $13.96 billion in sales, so the outlook represents a huge miss for Intel. The chip giant can probably shelve its plans for mid-to-high single digit revenue growth in 2023 and 2024 as well as its expectations for revenue growth to accelerate to 10%-12% by 2026. The big question is just how bad cash burn will be at Intel in the next few years, and whether the company will sustain its dividend. Adjusted free cash flow at Intel for 2023 and 2024 had been expected to be net neutral, but given the massive revenue declines experienced in the fourth quarter and the terrible outlook to kick off 2023, investors should be extremely cautious those targets, in our view.
Fast forward to today, Intel has now cut its dividend payout, and we still don’t like shares. The chip maker’s financials no longer fit what we’re looking for in an idea within any newsletter portfolio, and its dividend cut precludes it for consideration as a dividend growth or income idea. We can’t say the dividend cut was unexpected, but Intel’s fall from grace the past several years has been a bit surprising. We expect to update our reports on Intel soon.
Tickerized for INTC, AMD, ASML, NVDA, QQQ, RSP, SPY, TSM, TXN, LRCX, KLAC
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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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