Is This High-Yield Blue Chip’s Dividend Safe?

Intel (Nasdaq: INTC) is slipping. The storied blue-chip stock’s recent fourth-quarter results were mixed at best. And that’s being charitable.

Citing economic and market headwinds, revenues for the period fell by nearly one-third, deepening the full-year slide to 20%. The company collected $63 billion in sales versus $79 billion the prior year. On the plus side, it converted those revenues into $15 billion of operating cash flows in support of $6 billion in dividend distributions.

We already knew the current environment presented challenges. I cited a few of them in my initial profile back in November, including a post-Covid slump in consumer PC demand and cautious IT spending on corporate workstations. I was expecting $64 billion in sales, so the $63 billion figure isn’t too far off the mark.

But operating margins, which had been under pressure, collapsed to just 4.3% last quarter, producing an adjusted profit of $0.10 per share. That tally missed Wall Street’s $0.20 per share target by a mile. And things may get worse before they get better, as management is bracing for a net loss of $0.15 per share next quarter on slimmer revenues of $11 billion.

Intel has addressed the slowdown and is implementing aggressive cost-cutting initiatives expected to yield $3 billion in savings this year. These measures could shave $8 to $10 billion in red ink from the books by 2025. That starts at the top with a 25% pay cut for CEO Pat Gelsinger, along with reductions for senior execs and mid-level staffers.

About That Dividend…

Whenever you hear the phrase “cash preservation” in a quarterly conference call, dividends are immediately called into question. At an annual cost of $6 billion (and with free cash flow turning negative), INTC’s attractive 5% yield could be in jeopardy if sales continue to weaken over the next few quarters.

But management just publicly reaffirmed its commitment to maintaining the current payout. It can also tap into a massive rainy-day cash stockpile if necessary.

Still, if cash flows don’t stabilize soon, it may be best for Intel to divert a portion of the dividend into the R&D department to avoid falling behind. Particularly with heavy expenditures ($20+ billion) in fabrication plants on the way.

It’s worth noting that Intel’s credit rating has just been downgraded for the first time since 1993 (although, going from A+ to A, it remains in the upper investment-grade echelons).

The silver lining: 30% growth in Intel’s foundry division last quarter. This venture has now generated $895 million in sales over the past 12 months. While still small compared to the core client computing and data center divisions, this promising segment should ramp up to become a larger contributor thanks to the new CHIPS Act, which set aside $50 billion in tax credits and grants to stimulate domestic semiconductor production.

Closing Thoughts

The contrarian in me wants to see Intel prove the doubters wrong. Lost in the noise is the fact that it actually clawed back market share last quarter. Plus, the bar is set so low that any marginal improvement could spark a nice rally. But the sudden collapse of margins and cash flows is concerning, as is the persistent slump in PC and server chip demand, which is plaguing rivals as well.

If you own INTC, I think the most prudent course of action is to sell here and watch from a safe distance.

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