Intel CEO Pat Gelsinger.
Ting Shen / Bloomberg
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Under Managing Director Pat Gelsinger,
Intel
has pledged to massively increase its capital expenditure investments by tens of billions of dollars. But with a rapidly slowing global economy, recurring product delays, growing competitive threats and political uncertainty, it may need more help to fund its ambitions.
A good place to find it would be
Intel
‘small
(point: INTC) generous dividend payment. While the chip maker has been paying a steady dividend for three consecutive decades, it must do whatever it takes to support its future — even reducing the dividend.
Shares of Intel closed 2.2% lower at $ 37.78 on Tuesday. It has decreased by 27% this year.
How did we get to this point? Just months ago, it seemed that Gelsinger’s recovery strategy for faster product replication and expansion of the foundry business was well under way.
In January, the company’s board increased its cash dividend by 5% to $ 1.46 per share per year, or about $ 6 billion in total. Despite the inflationary pressures, the management confirmed the guidance for the whole year in April and predicted a recovery in computer sales for the last half of the year. Forecasts for 2022 at the time included $ 76 billion in revenue, $ 27 billion in capital expenditure — up more than 40 percent from last year — and about $ 1.5 billion in negative free cash flow.
Guidance now seems impossible. Earlier this month at an investor conference, Intel Chief Financial Officer David Zinsner said macroeconomic issues and component supply issues were much worse than expected for the current quarter. His comment, along with the growing activity of discounts at retailers, makes it possible that the company will have to revise its forecasts downwards.
Intel declined to comment on the risks surrounding its year-end financial outlook. The company said in a statement sent by e-mail that it “remains committed to a healthy and growing dividend.”
One thing is even more troubling about the business environment: Intel core product performance continues to falter. For years, the company has been losing market share in the lucrative data center server. Its data center unit generated revenue of approximately $ 26 billion for 2021 — almost steadily from year to year — while
AMD
‘small
(
AMD
) data center revenue more than doubled, thanks to better-performing chips.
“We have seen AMD surpassing Intel as the market leader in the most conscious segments of the server CPU market,” Morgan Stanley analyst Joe Moore wrote in a note last week.
Recent developments suggest that AMD could continue to gain market share. A few weeks ago, Intel executive Sandra Rivera revealed that the company’s next-generation Sapphire Rapids server processor will grow later than planned, and admitted that it may not exceed AMD’s next server chip, called Genoa.
On Monday, AMD CEO Lisa Su confirmed this Barron’s in a telephone interview that Genoa is well on its way to starting later this year and expressed optimism about its market position vis-.-vis Sapphire Rapids. “The data center is the biggest bet for AMD,” he said. “We believe that Genoa is a leader in a show [standpoint], performance per watt and total cost of ownership. That’s what we hear from our customers. “
Intel is faltering in other product categories as well. The company’s new line of graphics chips has suffered from delays and does not even look competitive. Techspot, a tech-savvy website, said Intel’s graphics offering could be “the most overwhelming hardware release” this year, citing poor performance.
If you add Intel products and financial difficulties, the company will soon have to make some difficult choices.
During the company’s investor day in February, Zinsner said that Intel intends to generate dead-end cash flows assuming medium to high single-digit revenue growth for 2023 and 2024. Last Thursday, Barron’s Investing in the Tech Conference, he said the company’s capital spending plans are over $ 100 billion over the next five years. But if revenue falls – something that seems inevitable with Intel’s recent problems – these cash forecasts will be out of the market unless there are budget cuts elsewhere. He has to give something.
Then there is the logjam in Congress. Last week, Intel formally told government officials that the pace of its investment in the new multi-billion-dollar Ohio plant could slow down if CHIPS – legislation that includes $ 52 billion in domestic research incentives and – no passage.
But before Intel changes its plans, the first thing on the cutting block should be its dividend. Simply put, the $ 6 billion a year Intel has set aside to pay shareholders will be better used for R&D and the growth or maintenance of its capital-investing investments.
The numbers would be significant. By cutting the dividend over the next four years, Intel would have nearly $ 24 billion in additional capital to invest in innovation. Comparatively,
Nvidia
(NVDA) spent $ 5.3 billion on total R&D last year.
Of course, there will be some income-oriented investors who may sell their stake in Intel if they no longer pay a dividend. But with 11 times as much profit, Wall Street does not give Intel a large premium for its shareholder return policy. And the chip maker can always restart a dividend once it returns to better profitability.
For now, Intel must accept the precarious reality and use all the financial resources at its disposal instead of cutting costs. This means that the Intel dividend must end. It is the prudent and correct movement.
Write to Tae Kim at tae.kim@barrons.com