3 Reasons Intel Corporation’s Dividend Is in Serious Trouble

Many Intel (NASDAQ: INTC  ) investors are very pleased with the company's most recent earnings results. In fact, there have been several stories suggesting that the PC industry is recovering and speculating on how Intel's fortunes may potentially improve. However, even with recent improvements, there are at least three reasons investors need to keep a close watch on Intel's dividend situation.

A 3.5% increase might not be enough
According to research firm Gartner, traditional PC and laptop sales are predicted to decline over the next year. However, that really isn't the whole picture. If you add PC and laptop sales to hybrid sales, the total is actually expected to increase by about 3.5% on a year-over-year basis.

While a 3.5% increase sounds like good news for Intel, this is actually the first reason Intel's dividend is in trouble. In Intel's current quarter, the company's PC client group reported that, while notebook volumes increased by 2%, desktop volumes were flat.

By comparison, ARM Holdings (NASDAQ: ARMH  ) reported a 16% increase in chip shipments, and Qualcomm (NASDAQ: QCOM  ) reported shipping 17% more devices. This is a key difference between Intel's position and its mobile-focused competitors. Intel still gets more than 60% of its revenue from PC sales and more than 66% of its operating income from profitable divisions.

The much larger problem is that Intel wants its future to be mobile, yet this division is dying on the vine.

25% into the year and at less than 13% of goal
One of Intel's goals for the year is to ship at least 40 million tablet chips. The company was quick to point out that it shipped 5 million of these chips in the last three months. The second reason Intel's dividend is in trouble is that this figure represents less than 13% of the company's goal for the year.

Given that both ARM Holdings and Qualcomm are heavily mobile-focused, Intel needs to worry about its future in the mobile space. Intel's mobile and communications group is a black hole of revenue and profitability.

This division alone accounted for an operating loss of over $900 million, and revenue declined by more than 60% year-over-year. Compared to the 15% annual revenue growth at ARM Holdings, or the 10% revenue growth from Qualcomm, Intel's mobile aspirations look like a very big challenge indeed.

This former cash king is being kicked off the throne
Many investors might point to the fact that Intel has billions of dollars in cash and investments. However, the company also carries over $13 billion in long-term debt. Net cash and investments at Intel are actually less than $5 billion, which is down more than 20% compared to last year.

In the past, Intel's free cash flow was so substantial that the company's dividend payout wasn't even a thought in many investors' minds. This is the third and most pressing problem facing Intel's dividend; between the huge competitive challenges facing Intel, and the company's aggressive dividend policy, investors have a new worry.

In the last three months, Intel's core free cash flow (net income + depreciation – capex) was about $980 million. By comparison, the company paid about $1.1 billion in dividends during this same time frame, giving the company a payout ratio of 112%.

Looking at ARM Holdings' core free cash flow payout of 29%, or Qualcomm's payout of 30%, Intel's payout looks problematic. While neither company's dividend yield is as impressive as Intel's, a high yield doesn't mean much if it's not sustainable.

Foolish final thoughts
The bottom line is Intel is a well-known technology name, yet the company's future is highly uncertain. While the future of the PC, hybrid, and tablet industry will certainly change Intel's future, the company's cash flow issues are a very present issue.

Investors can't afford to ignore the warning signs. Unless Intel makes some major changes, the company's dividend is far less stable than many might think.

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Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 22, 2014, at 3:09 PM, will1946 wrote:

    I do not think at all that Intel's future is uncertain; pc's are not going away, and i rather think their decline has stabilized. However, I do not understand Intel's obsession with mobile.

  • Report this Comment On April 22, 2014, at 3:30 PM, sklarb wrote:

    PCs aren't going away, I agree. I am one of the 10,000 baby boomers retiring every day. I have a smartphone for when I travel but I never use it except for phone calls when I'm home. I use my all in one desktop. Since I can do anything on my cell that I could do on a tablet, I see no need for one especially since I wouldn't want to make phone calls on a tablet. Many retirees will do the same thing and there are a lot of them, either with a desktop or a laptop. We are also older and want a bigger screen at home anyway. There won't be as much need for a retiree to be connected via a mobile device when we don't have to travel every day. I take my phone with me when I go to the store as a precaution because I live in the mountains, but I turn it off and lock it in my glove compartment. We aren't addicted to being connected 24/7 like our kids. And the so-called "internet of everything" is in its infancy. Chips will become all pervasive over time so the mobile versus stationary computer argument is moot anyway.

  • Report this Comment On April 22, 2014, at 9:38 PM, techy46 wrote:

    Intel's dividend in question? This guys trying to create FUD because he missed the boat!

  • Report this Comment On April 23, 2014, at 12:38 PM, motleycrew128 wrote:

    Maybe I am missing something. You stated that ARMH reported a 16% increase in chip shipments, yet ARMH is an intellectual property company,.... they license IP they don't make anything.

    Where did this 16% number come from, and what does it actually represent?

  • Report this Comment On April 23, 2014, at 1:20 PM, EirikRaude2000 wrote:

    Three Reasons:

    1 - A 3.5% increase might not be enough

    2 - 25% into the year and at less than 13% of goal

    3 - This former cash king is being kicked off the throne

    As to 1: it is difficult to interpret as a reason of a Dividend 'In Serious Trouble',in the context of the company's long-term direction.

    As to 2: This relates to tablets that INTC subsidizes at $25/unit if one can believe other commenters. Probably a good thing if the company fails to reach its goal if one is concerned, as the writer claims to be, about cash flow.

    As for 3: This is not a reason but instead a conclusion.

  • Report this Comment On April 23, 2014, at 2:04 PM, EirikRaude2000 wrote:

    Three 'Reasons'?

    1 - A 3.5% increase might not be enough

    2 - 25% into the year and at less than 13% of goal

    3 - This former cash king is being kicked off the throne

    As to 1: iI is difficult to interpret this section as containing a reason of a Dividend 'In Serious Trouble', given the the company's long-term direction.

    As to 2: If this statement relates to tablets that INTC subsidizes at $25/unit if one can believe other commenters, then it is probably a good thing if the company fails to reach its goal if one is concerned, as the writer claims to be, about cash flow.

    As for 3: This is not a reason but instead a conclusion.

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