Well…
It finally happened.
After much speculation, Intel Announced that they would be cutting their quarterly dividend
66%, to 12.5 cents per share.
This brings their forward looking annual dividend to 50 cents and a current dividend yield of
around 1.9%.
My initial investment thesis for Intel is now broken.
I was wrong.
In today’s video, I’m going to explain the reasoning behind this dividend cut and
share what I’m doing with my Intel stock.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
So what happened?
Intel was once the dominant global chip company, vertically integrated across design and manufacturing.
However, in the most recent decade they missed key transitions to new product categories
like Mobile and fell behind in manufacturing advancement.
Companies like TSMC gained the manufacturing and process edge, sparking opportunities for
fabless designers like AMD to take market share from Intel.
Prior Intel customers, like Apple, started to design chips as well, getting them manufactured
by TSMC.
Intel was at a crossroads.
They had to choose whether to focus on design and shift production outside the company or
double down on spending to regain manufacturing leadership.
When new CEO Pat Gelsinger took the helm in 2021, he chose the latter.
He committed Intel to regain process leadership for not only their own designed chips, but
a new third party foundry business.
This would allow them to manufacture for other designers and compete with companies like
TSMC.
That was a bold vision and required massive long-term investment.
Personally, I found this plan compelling.
As of 2020, Intel was raking in profits.
They had a very sustainable dividend and a strong balance sheet.
I thought they would be able to fund this transition, while maintaining their strong
cash generation.
As the stock price began to fall in early 2022, I used this as an opportunity to buy
up the stock for my dividend growth portfolio.
My thesis was that Intel would pay a strong dividend, with reliable profits, as they invest
for future growth.
However, I proved to be wrong.
In the back half of 2022 and early 2023, Intel’s earnings collapsed.
Their forward guidance is projecting a large loss in the following quarter.
They are expected to continue this poor performance through most of 2023.
Intel’s largest business segment, client computing group, which is primarily CPUs for
PCs, is facing a terrible year.
There is a chip surplus now that demand has fallen off, compared to the work from home
boom.
This is leading to excess inventory and price cutting.
On top of this, Intel’s spending has gotten out of control.
Capital Expendutures ballooned to $20 billion in 2021 and $25 billion in 2022.
2022 free cash flow was negative $9.6 billion.
This is expected to be a similar loss in 2023 and may take many years to return to prior
numbers.
Basically, the worst situation possible is happening to Intel.
They’re spending more than ever, while making less than ever.
It became clear this would be a long and painful transformation.
The only part of my investment thesis still intact was the dividend payment.
However, as I mentioned earlier, Intel has now cut its quarterly dividend over 65% to
12.5 cents per share.
This is the final straw for me, as my initial thesis is now entirely broken.
I was wrong.
I now sold all of my Intel stock at $26.11, a 20% overall loss.
I was at least able to sell it up on the day, prior to the stock falling over 1 more%.
So why did I sell?
Quite a few Intel investors are actually happy about the dividend cut, as it will help Intel
be able to fund their massive investment in new fabrication plants.
That’s true and may be a necessary strategic decision for the company.
However, not all is sunshine and rainbows.
This dividend cut is a signal from Intel management that they do not expect their cash flows improving
anytime soon.
Their balance sheet was more than able to support their current dividend for at least
a weak financial 2023.
As the company has gained more foresight into the future, they obviously thought a dividend
cut would be necessary.
Intel may be in for a long recovery.
Without that dividend, I have very little incentive to hold my shares and wait for the
turnaround.
On top of that, there is the very real risk of this not being a successful transition.
I’m pretty optimistic long-term, but clearly there are major obstacles.
As an investor, I don’t need to own the stock and can always wait until success is
clear before buying back in.
Plus if 2023 is as bad as expected for Intel, then there may be way better buying opportunities
coming later.
There are even more reasons for my selling of Intel stock.
For one, this is in a dividend growth stock portfolio and Intel no longer fits that framework.
Two, I learned from prior mistakes with AT&T and even Disney.
In 2021, I should have sold AT&T immediately after the announced dividend cut.
The stock fell for the following year and still has not come close to recovering.
In 2020, I probably should have sold my small stake in Disney when they suspended their
dividend.
However, that was clouded by covid and other factors.
Going forward in my dividend portfolio, I will be much more disciplined about selling
dividend cuts and not getting caught up in these turnaround stories.
It’s much easier to invest in a business with a clear path to success, reliable financials,
and growing dividends.
I’ve already reinvested my Intel stock into a new company in my portfolio, Broadcom, ticker
symbol AVGO.
Although still a semiconductor company, Broadcom is basically the complete opposite of Intel.
For one, they have reliable, high, and growing free cash flow.
On top of this, they have massive dividend growth.
They are a fabless company that doesn’t need to invest in manufacturing advancement
and can instead focus on free cash flow generation.
They use this cash to pay huge dividends and invest in large acquisitions.
They have a growing software business and are set to acquire VMWare in the coming months.
I’m currently working on a broadcom stock review video which will be released in the
coming days.
Subscribe to the channel to make sure you see that.
Thank you for watching Dividend Data.
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Thanks for watching!