Intel (NASDAQ: INTC) has been under tremendous pressure this year. Shares of the semiconductor company have tumbled about 50%. That decline has pushed its dividend yield to 5.6%.
While Intel is facing its share of headwinds, I believe better days lie ahead for the tech giant and its big-time dividend. That's why I'm doubling down on my position. I have growing confidence Intel can sustain and grow its dividend in the coming years.
Building out a chip behemoth
Intel is struggling these days. Revenue tumbled 22% in the second quarter to $15.3 billion. Meanwhile, the company reported a net loss of $500 million, well below the $5.1 billion profit it posted in the prior-year period.
CEO Pat Gelsinger didn't mince words when discussing the company's second-quarter results. He stated: "This quarter's results were below the standards we have set for the company and our shareholders. We must and will do better." While the sudden and rapid decline in economic conditions was a big driver, Gelsinger noted that "the shortfall also reflects our own execution issues."
The company is working to address its issues. It's investing heavily to build new semiconductor manufacturing capacity to capitalize on the large and growing market opportunity. It's spending up to $30 billion to build two fabrication plants in Arizona. Meanwhile, it could spend upwards of $100 billion apiece to build new complexes in Ohio and Germany. The company sees these investments as crucial in helping it capture the growth ahead for semiconductor sales, which could double by the end of the decade to more than $1 trillion.
Building a funding bridge
Intel is investing an enormous amount of money to capitalize on what could be a massive opportunity. However, investors are concerned that it might be taking on more than it can handle. The company expects to invest $23 billion this year on expansion projects. That spending level puts its adjusted free cash flow at negative $1 billion to $2 billion.
That's causing some concern that Intel might need to cut its dividend to help finance its aggressive expansion plans. That would save it almost $6 billion per year.
However, Intel believes it can maintain its payout amid this investment cycle. The bedrock of that belief is its strong balance sheet. Intel has a hefty cash balance, ending the second quarter with $27 billion of cash and short-term investments. Meanwhile, it has A-rated credit, giving it the flexibility to borrow money at attractive rates. It's also planning to complete an initial public offering of its Mobileye subsidiary to raise additional cash to help fund its new factories.
Intel has also accelerated the deployment of its smart capital strategy. It signed a first-of-its-kind semiconductor co-investment program with leading global infrastructure investor Brookfield Infrastructure (NYSE: BIPC)(NYSE: BIP). The deal will see Brookfield Infrastructure and its institutional partners fund 49% of the up to $30 billion projected price tag for its Arizona fabrication facilities.
The partnership will provide a cumulative $15 billion benefit to Intel's adjusted free cash flow over the next few years. That will help protect its cash and debt capacity for future investments while allowing Intel to fund a healthy and growing dividend. The framework serves as a blueprint for potentially similar transactions to help finance other capacity expansions.
Meanwhile, Intel could be the single biggest beneficiary of the CHIPS Act that the U.S. Congress recently passed to boost domestic high-tech manufacturing. The company could collect several billion dollars in payouts over the next few years to help fund its expansion projects.
None of this guarantees that Intel will be able to maintain its dividend, let alone continue growing the payout as it executes its expansion strategy. However, the company's strong balance sheet and deal with Brookfield are helping build a bridge to better days when its new plants come online and start growing its cash flow.
The dividend appears poised to continue growing
Intel has a pretty solid track record of paying dividends. The tech giant has steadily increased that payout over the years and intends to continue doing so in the future. That seems much more likely following its deal with Brookfield and the passing of the CHIPS Act.
Because of that, I believe Intel can deliver on its promise to continue growing its dividend. That's why I recently doubled down on my position to capitalize on the steep slide in its stock price and lock in an even more attractive dividend yield.
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Matthew DiLallo has positions in Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, and Intel and has the following options: long January 2025 $30 calls on Intel, short January 2025 $30 puts on Intel, and short November 2022 $55 calls on Intel. The Motley Fool has positions in and recommends Intel. The Motley Fool recommends Brookfield Infra Partners LP Units, Brookfield Infrastructure Corporation, and Brookfield Infrastructure Partners and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, short January 2023 $57.50 puts 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.
