After years of struggling through a seemingly perpetual turnaround, Intel (NASDAQ: INTC) said on Wednesday that it was cutting its quarterly dividend from $0.365 per share to $0.125, slashing it by 66%.
Arguably, Intel's dividend had been the best reason to own the stock, and the move cut its dividend yield from 5.5% to 2%. As you can see from the chart below, Intel's dividend is now even lower than it was a decade ago. It's back where it was in 2007.
Investors largely shrugged off the move as the stock fell 2.3% on the news. And that's a sign that the market had expected a dividend cut or that some investors thought it was the right move. Intel is already burning billions of dollars in cash, and the company plans to spend up to $100 billion on new foundries in the U.S.
In the press release announcing the dividend cut, management said the decision was "designed to position the company to create long-term value" and added, "The improved financial flexibility will support the critical investments needed to execute Intel's transformation during this period of macroeconomic uncertainty."
Management said it was committed to maintaining a competitive dividend. They stressed that the move was necessary to execute its Integrated Device Manufacturing (IDM) 2.0 strategy, which includes building new fabs in Arizona, diversifying into new revenue streams like artificial intelligence and 5G, and offering its foundry services to competing chip companies.
Image source: Getty Images.
The warning in the dividend cut
Investors may not have been surprised by the dividend cut, but the company seemed to say in the fourth-quarter earnings call that it had no plans to cut the quarterly payout. Asked about it on the call, CFO Dave Zinsner said, "We're going to remain committed to being very prudent around how we allocate capital for the owners," and added, "We are committed to maintain a competitive dividend."
The company echoed the same remark about maintaining a competitive dividend in the dividend cut announcement. However, the goalposts have moved considerably as many income investors who hold Intel stock are unlikely to be happy with the new payout. The cut could also imply that Intel's prospects have weakened since its fourth-quarter earnings report a month ago.
Intel did reaffirm its first-quarter guidance, which should alleviate some of those concerns. But that guidance was already dismal, forecasting $10.5 billion to $11.5 billion in revenue, or a decline of 40% from the quarter a year ago. The company expects an adjusted loss per share of $0.15.
Whether the company's outlook for the remainder of the year has changed is unclear.
Was it the right move?
I was critical of Intel for laying off staff and cutting salaries and benefits while maintaining its dividend, which cost $6 billion last year while the company burned $9.4 billion in free cash flow. Against that backdrop, cutting the dividend makes sense. Doing away with it entirely may have been the better move for its financial future, but a 66% cut seems like a fair compromise not to totally alienate the dividend investors who count on the payout.
Some of Intel's problems are outside of its control. The chip sector is in a down cycle, especially PCs, as their sales dropped after the boom during the pandemic.
Intel's IMD 2.0 strategy sounds bold, but it still carries many risks, especially considering the upfront costs involved in building out new fabs. It's also not a new strategy, as the company announced it nearly two years ago -- and has relatively little show for it so far.
While the dividend cut was the right move, Intel's first-quarter guidance makes it clear that things will get worse for the company before they have a chance at getting better. Management has $4 billion more in cash to play with right now, but the turnaround strategy won't be easy to pull off, especially as it faces stiff competition.
Staying on the sidelines seems like the most logical move until it's clear that IDM 2.0 is starting to pay off.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
