Wall Street Braces for Intel to Cut Its Record Dividend

(Bloomberg) — Intel Corp.’s cratering stock has made its dividend yield the highest among large technology companies. With capital spending demands surging and the business bleeding cash, speculation is rampant on Wall Street that the payouts won’t last.

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At its current rate, Intel’s $0.365 quarterly dividend is projected to cost more than $6 billion in 2023. Analysts from Morgan Stanley and Credit Suisse are among those concerned that the chipmaker will be forced to prioritize the heavy spending needed to regain its manufacturing leadership and cut shareholder payouts, threatening a fresh blow for its beleaguered stock.

“The dividend seems inconsistent with the lack of cash generation and the heavy investment cycle,” wrote Morgan Stanley analyst Joseph Moore. Manufacturing progress is critical to Intel’s turnaround plan and “everything else needs to be tailored to that goal,” said Moore.

At more than 5%, Intel’s yield — calculated by dividing the annual payout by the stock price — dwarfs those of chipmaker peers. The company paid its first dividend in 1992 and has been increasing it ever since, a period over which Intel taught the rest of the chip industry the importance of having the best manufacturing technology. That came with a huge cost in research, design and capital spending but delivered more than enough cash to cover the tab and steadily raise payouts.

But in ceding leadership in chip production to deeper-pocketed companies like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., Intel now faces a group of competitors making inroads into its dominance of the markets for personal-computer and server processors.

In its fourth-quarter earnings report, Intel gave one of the gloomiest forecasts in its history, predicting a surprise loss for the current period and a sales range that missed analyst estimates by billions of dollars.

The combination of big spending and falling revenue prompted downgrades from the three major credit-rating agencies. Bloomberg Intelligence calculated that Intel’s cumulative uses of cash could exceed internal cash generation by more than $20 billion through 2024.

Intel’s management is acutely aware of the importance of maintaining its payout. Even so, when asked about the dividend on last month’s earnings call, Chief Financial Officer Dave Zinsner didn’t dismiss the idea of a cut.

“The board, management — we take a very disciplined approach to the capital allocation strategy and we’re going to remain committed to being very prudent around how we allocate capital for the owners,” he said. “And we are committed to maintaining a competitive dividend.” The company declined to comment further for this story.

Of course, the company could choose to keep the dividend going around the current level. A Bloomberg dividend projection calls for Intel to maintain the payout.

Intel’s ultimate decision will have big consequences for its stock, which has fallen nearly 42% over the past year amid a historic slump for chips used for personal computing. The Philadelphia Stock Exchange Semiconductor Index is down 13% over the same period.

On Wednesday, Intel fell 1%, while the industry index slid 0.9%.

A dividend cut would almost certainly bring more pain for the stock in the near term, according to Charles Sizemore, chief investment officer of Sizemore Capital Management.

“Different types of investors gravitate to different types of stocks,” he said. “If your core clientele is income investors, and you’re no longer attractive as an income stock, you become an orphan of sorts.”

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–With assistance from Subrat Patnaik and Tom Contiliano.

(Updates with value of quarterly dividend in second paragraph and Bloomberg dividend projection in the 10th.)

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