Intel's Dividend May be in Jeopardy

Shares on Intel (INTC) have fallen -41% over the past year, which has pushed the company’s dividend yield up to 5.1%, the highest among large technology companies.  However, speculation is mounting among analysts that the company will soon need to cut its dividend as capital spending demands rise and its cash flow shrinks.

At the current dividend rate of over 5%, Intel is expected to pay out more than $6 billion this year. Analysts are concerned that the company will be forced to prioritize the heavy spending needed to regain its manufacturing leadership and cut shareholder payouts.  Morgan Stanley said, “the dividend seems inconsistent with the lack of cash generation and the heavy investment cycle.” 

Intel paid its first dividend in 1992 and has been increasing it ever since.  However, at more than 5%, Intel’s yield, calculated by dividing the annual payout by the stock price, is the highest in the sector. Intel lost its leadership in chip production to Taiwan Semiconductor Manufacturing and Samsung Electronics and will need to boost spending in research and design if it wants to recover its market dominance.

In its Q4 earnings report last month, Intel gave one of its most downbeat forecasts ever, predicting a surprise loss for the current period and sales estimates that missed the consensus by billions of dollars.  That prompted downgrades from the three major credit rating agencies.  Bloomberg Intelligence calculates that Intel’s cumulative cash use could exceed internal cash generation by more than $20 billion through 2024.  When asked about the company’s dividend during last month’s earnings call, Intel CFO Zinsner didn’t dismiss the idea of a dividend cut.

If Intel decides to cut its dividend, that would likely put downward pressure on its stock price, which has already been hammered over the past year amid a historic slump for chips used for personal computing.  Sizemore Capital Management said a dividend cut would almost certainly bring more pain for the stock in the near term as some income investors liquidate their holdings. “If your core clientele is income investors, and your no longer attractive as an income stock, you become an orphan of sorts.” 

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