A wafer of Intel’s new Sapphire Rapids microprocessors, at the chipmaker’s headquarters in Santa Clara, Calif. on Jan. 9. Intel’s share price has declined by more than 60 per cent since April, 2021.Anastasiia Sapon/The New York Times News Service
Before Intel Corp. INTC-Q slashed its quarterly dividend by 66 per cent this week, the signs of a dramatic shift were already growing clear. The chip-maker’s revenue and profits plummeted in 2022, and management’s commitment to its payout had begun to soften.
What’s not-so-clear: Whether the downtrodden stock has at last hit rock-bottom, as the company faces a softer economy and focuses on expanding its semiconductor capacity on U.S. soil – an approach that analysts warn will take a lot of time and money.
“We think it will take at least two years, perhaps more, for that strategy to play out,” said Chris Caso, an analyst at Credit Suisse, in an interview.
Intel’s share price has declined by more than 60 per cent since April, 2021, inflating the dividend yield to a high of 5.6 per cent earlier this week.
The attractive yield may have drawn the interest of dividend-loving investors, who could take comfort from the fact that Intel has raised the payout regularly since 2004.
Intel, though, is not a steady utility. It is a technology giant facing intense competition with huge demands on its cash to fund innovation, develop and manufacture new products and – perhaps most daunting – expand its U.S. manufacturing facilities with new multibillion-dollar investments.
It is also operating within a difficult environment of high inflation and slowing economic activity. In the fourth quarter, personal computer shipments fell 28.5 per cent from the same period in 2021, according to Gartner Inc. That marked the sharpest decline since the research and advisory firm began tracking the PC market in the mid-1990s.
Intel’s financial results are reflecting the strain. Annual revenues fell 20 per cent in 2022 from the previous year, and net income fell 60 per cent over the same period.
Pat Gelsinger, Intel’s chief executive officer, said during a call with analysts this week that the “green shoots of execution are emerging.” Nonetheless, management is projecting a loss of 80 US cents per share in the first quarter of 2023 (or a loss of 15 US cents per share after one-time adjustments), implying that instability will linger at least in the near-term.
The decision, then, for Intel to reduce its quarterly payout for the first time since 1998 – to 12.5 US cents a share, payable on June 1, from 36.5 US cents previously – is hardly shocking. It is part of a plan to find US$3-billion in savings this year.
What can investors expect next?
There is some good news here. Intel’s share price is approaching nine-year lows, which suggests that a lot of bad news is already baked into the stock.
As well, companies are reluctant to meddle with their dividends, often turning to cuts as a last option. A lower payout – and the often dismal justification that goes with it – which can mark the final washout in investor sentiment before a stock recovery begins.
Intel’s share price slid 3.5 per cent in the three trading days since the company cut its dividend this week, at a time when the broader stock market also retreated. The panic-free reaction implies the long selloff is – perhaps – nearly over.
Still, this bet will take some resolve, and it requires a contrarian streak. Analysts are overwhelmingly bearish, with just nine of the 45 who cover the stock recommending investors buy it, according to Bloomberg. That’s a grim ratio by Wall Street standards.
Mr. Caso, the Credit Suisse analyst, resides in the middle ground with a “neutral” recommendation and a target price of US$25. The stock ended the week at US$25.14, which implies that he sees it essentially drifting sideways over the next 12 months.
If the economy and PC sales remain weak this year, adding strain to Intel’s cash flow, he thinks the company will likely have to make deeper cuts to save money, perhaps by divesting assets that are not deemed essential.
“It is a somewhat audacious strategy to be spending so much capital in order to rebuild the manufacturing. Frankly, it has never been done before in the industry,” Mr. Caso said.
Still, he added that Intel’s aggressive strategy doesn’t rest on quick success over the next couple of quarters. But, over the longer term, it could prevail as efforts toward removing geopolitical risks and improving supply networks gains steam in the U.S.
A bet on Intel isn’t necessarily a long-shot. It is, however, one that requires patience.