Intel: The Dividend Should Have Been Cut Completely, Remains A Value Trap

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Intel (NASDAQ:INTC) has reported very anemic operating trends precocious and business prospects are highly uncertain, it remains a worth trap moreover aft its dividend cut.

As I discussed successful a previous article immoderate months ago, while Intel banal was offering a high-dividend output astatine nan time, its dividend sustainability was questionable and a dividend trim was apt ahead. The institution defended its dividend immoderate weeks ago, erstwhile it presented its yearly earnings, but has precocious decided to cut its quarterly dividend by 66%.

This is not astonishing for investors who travel Intel much closely, which besides explains why its stock value didn't respond overmuch to this news, arsenic its business fundamentals person deteriorated considerably complete nan past mates of years, and to support its dividend astatine existent levels it would request to summation its equilibrium expanse leverage.

Intel will prevention important rate from this decision, but its dividend isn't sustainable and nan institution should person trim it wholly successful my opinion. In this article, I analyse its astir caller net and business prospects, to spot if worth remains a trap aliases astir of nan antagonistic news travel and sentiment is already priced in.

Recent Earnings & Dividends

Intel released its Q4 and afloat twelvemonth 2022 financial figures immoderate weeks ago, which were rather weak. In Q4, its gross was astatine nan bottommost of its guidance and 3% beneath marketplace expectations, while its net were overmuch weaker fixed that its EPS was 48% beneath thoroughfare estimates, arsenic tin beryllium seen successful nan adjacent graph.

Earnings astonishment (Bloomberg)

Its revenues successful Q4 amounted to $14 cardinal (-28% YoY), its gross separator was 43.8% (down 12 percent points compared to Q4 2021), and its EPS was only $0.10 (-92% YoY). For nan afloat year, Intel generated gross of $63.1 cardinal (-16% YoY), while successful my erstwhile article, nan Street anticipation was for gross of much than $66 billion, its gross separator was 47.3% (vs. 58.1% successful 2021), and its EPS was $1.84 (-65% YoY).

Investors should statement that Intel's astir caller guidance was to make EPS of $2.30, frankincense its past 4th of nan twelvemonth was overmuch worse than guidance was expecting, which is simply a worrisome motion regarding a imaginable business turnaround.

Regarding its dividend, earlier nan cut, it was $1.46 per stock annually, which intends its dividend payout ratio related to 2022 net was 79%. This was a large summation from 28% successful 2021, showing that Intel's dividend sustainability was highly questionable.

While Intel had a very bully dividend maturation history, nan accelerated diminution successful its net led to a very precocious payout ratio, which was expected to worsen moreover much successful 2023, fixed that Intel is expected to study a nonaccomplishment for nan year. Moreover, astir companies successful nan exertion assemblage usually for illustration to execute stock buybacks alternatively of distributing dividends, which intends Intel's high-dividend output was not a awesome support for its stock price, arsenic conscionable based connected dividend output Intel was improbable to pull overmuch income-oriented investors.

Dividend (Bloomberg)

Following nan dividend cut, Intel will now administer a quarterly dividend of $0.125 per share, aliases $0.50 annually, which astatine its existent stock value leads to a dividend yield of little than 2%. This is simply a akin output compared to Taiwan Semiconductor Manufacturing Company (TSM) and almost double compared to ASML (ASML), which intends Intel's existent dividend is much in-line pinch its closest peers and still supra nan exertion assemblage average.

From a rate travel perspective, Intel paid astir $6 cardinal successful dividends during 2022, frankincense nan dividend trim will alteration it to prevention immoderate $4 billion, which is simply a important magnitude and will thief finance its maturation strategy focused connected nan foundry segment, which requires a batch of superior expenditures to build caller factories.

Investors should statement that while Intel's dividend was covered by net successful 2022, nan aforesaid did not hap erstwhile based connected rate flows. Indeed, Intel generated $15.4 cardinal successful rate from operations, which was not capable to finance adjacent to $25 cardinal successful capex, overmuch little its dividend. This intends that Intel was financing its dividend done nan issuance of debt, which is not sustainable complete nan agelong term.

At nan extremity of 2022, Intel's nett indebtedness was $8.2 cardinal and its nett debt-to-EBITDA ratio was 0.5x. This is still a comparatively debased leverage ratio and Intel has bully entree to rumor indebtedness connected superior markets, but to support a dividend that was wholly financed by indebtedness issuance is not nan champion attack complete nan agelong term.

Business Prospects

Regarding its business prospects complete nan short to mean term, Intel's guidance for nan adjacent 4th was rather bad, arsenic nan institution expects to study gross betwixt $10.5-$11.5 cardinal (-40% YoY), a gross separator of 39%, and a nett nonaccomplishment for nan quarter. As a accelerated turnaround doesn't look likely, Intel's financial figures and rate travel procreation are apt to deteriorate further compared to 2022, which intends Intel's existent dividend is intelligibly not sustainable and its guidance should person trim it completely, astatine slightest until its maturation strategy starts to present immoderate betterment successful nan company's fundamentals.

However, this is thing that whitethorn return immoderate clip to happen, fixed that Intel's foundry conception only represented 0.5% of full gross successful 2022, while its factories nether building will only beryllium operational astir apt during 2024 aliases 2025.

Foundry conception (Intel)

This intends that Intel's woes are not easy to move around, and an betterment successful its operating trends during nan adjacent fewer quarters must travel from its existing businesses, which proceed to struggle owed to fierce title from AMD (AMD) and Nvidia (NVDA), and an improved macroeconomic situation. This is mostly extracurricular of nan company's control, which does not bode good for early earnings. This besides explains why Intel only gave guidance for Q1, while for nan afloat year, nan institution didn't supply immoderate guidance, but hopes for immoderate economical betterment successful nan 2nd half of 2023.

Due to this reliable operating landscape, Intel intends to trim immoderate $3 cardinal successful costs successful 2023, which will thief to amended net and scope costs savings of $8-$10 cardinal by 2025. On nan different hand, it intends to support its investments arsenic expected to execute nan business translator it presented successful 2021. Regarding its merchandise roadmap, Intel said that it's fresh to manufacture utilizing nan astir precocious exertion Intel 4, nan first node deploying EUV, and is connected way regarding Intel 3. This intends that Intel tin summation its competitiveness successful nan 2nd half of 2023, which will beryllium cardinal for a imaginable gross rebound.

However, arsenic Intel has had respective merchandise setbacks successful nan past, investors shouldn't beryllium excessively excited astir these prospects and hold to spot if Intel tin amended its competitory position successful nan CPU marketplace pinch Meteor Lake this twelvemonth and Lunar Lake successful 2024.

Another affirmative facet for Intel's net successful 2023, is nan alteration of nan estimated life of immoderate of nan company's accumulation machinery and instrumentality from 5 to 8 years, which Intel believes to amended bespeak nan economical worth of its instrumentality complete time. This will trim its depreciation disbursal successful 2023 by $4.2 cardinal (vs. full depreciation of $11.1 cardinal successful 2022), an summation of $2.6 cardinal successful gross profit, and a alteration of $400 cardinal successful R&D.

Nevertheless, contempt this affirmative effect connected Intel's financial figures, nan marketplace is expecting 2023 to beryllium different reliable twelvemonth for nan company. Indeed, according to analysts' estimates, gross should beryllium astir $50 cardinal (-19.8% YoY) and is expected to study a nonaccomplishment for nan twelvemonth of astir $2.5 billion. Capex is expected to beryllium adjacent to $20 billion, which will lead to a antagonistic free rate travel of much than $7 billion.

In nan pursuing years, a betterment is expected fixed that gross is estimated to beryllium astir $65 cardinal by 2025, only somewhat higher than compared to 2022, but uncertainty correct now is rather precocious and investors should return medium-term estimates pinch caution. Intel intelligibly needs to execute good connected its business strategy to revert to caller weakness, which is not an easy task, and muted gross and net are apt successful nan adjacent fewer quarters.

Conclusion

Intel continues to study anemic net and its caller determination to trim its dividend was not unexpected, and successful my opinion, nan dividend should person been trim completely, fixed that is not supporting its stock value and Intel's free rate travel is negative, frankincense a dividend costs does not make overmuch sense.

While successful nan past bulls could reason that Intel was trading astatine overmuch little multiples than its peers and offered a high-dividend yield, this was destroyed precocious by its reported losses and dividend cut. Intel's existent business prospects are mostly uncertain and a rebound seems to beryllium much wishful reasoning than thing reasonable to expect successful nan short term. Thus, Intel remains a trap until its fundamentals improve, which whitethorn return immoderate clip to happen.