Last year, Intel (NASDAQ:INTC) announced plans to repurchase $20 billion in shares over the following 15 to 18 months. The chipmaker purchased $7.6 billion in shares in the fourth quarter of 2019 and the first quarter of 2020, but recently announced that it would suspend all future buybacks in light of the novel coronavirus (COVID-19) pandemic.
Intel stated that its dividend payments wouldn't be affected, but the abrupt suspension of its buybacks still raises a red flag. Let's examine Intel's dividend and see if a prolonged coronavirus crisis could lead to painful dividend cuts.
A closer look at Intel's dividend
Intel generated free cash flow of $16.9 billion over the past 12 months. Its spent 33% of that total on dividends during that period, and 80% on buybacks. It's not unusual for mature tech companies to spend over 100% of their FCF on dividends and buybacks, since they can afford to dip into their cash reserves to reduce their outstanding shares.
Back in January Intel estimated its revenue would rise 2% to $73.5 billion in fiscal 2020, its FCF would dip 2% to $16.5 billion, and its non-GAAP EPS -- buoyed by buybacks -- would grow 3%. Intel hasn't pulled that guidance yet, but it will likely post significantly lower EPS growth without the help of big buybacks.
In Intel's 8-K filing, it warns that the COVID-19 outbreak could "materially adversely affect our financial condition and results of operations." It also notes that the degree of the impact still depends heavily on "future developments" which "cannot be predicted."
Intel currently pays a forward dividend yield of 2.5%, and it's hiked that payout annually for five straight years. Suspending the buybacks significantly reduces pressure on its FCF, and leaves Intel plenty of room for future hikes -- even as the crisis escalates.
Why the buybacks were a terrible idea
I'm generally not a fan of big buybacks, since they're too frequently used to "buy" EPS growth or offset dilution from stock-based compensation. Buyback plans also frequently cause companies to buy back their shares at high prices, or ignore investments or acquisitions which could otherwise improve their core businesses.
That's why Intel's $20 billion buyback plan was ill-conceived. Intel currently faces intense competitive pressure from AMD (NASDAQ:AMD) in the PC and data center markets, as well as an unresolved CPU shortage that is frustrating many OEMs. It's also developing discrete GPUs to challenge AMD and NVIDIA (NASDAQ:NVDA).
AMD and NVIDIA both have visionary leaders with engineering backgrounds. AMD CEO Lisa Su convinced Sony and Microsoft to use its chips in its gaming consoles, and rebooted its CPU and GPU efforts with higher-quality chips that gained ground against Intel and NVIDIA, respectively.
NVIDIA CEO Jensen Huang kept the chipmaker at the head of the gaming market, expanded into the data center and driverless car markets, and kept its Tegra CPU line alive in the Nintendo Switch and its own Shield devices.
Intel CEO Bob Swan, however, was previously the company's CFO. Swan took over after former CEO Brian Krzanich abruptly resigned in mid-2018, but the chipmaker still hasn't resolved its most pressing issues: competition from AMD, its CPU shortage, sluggish demand from data center, and its ability to develop faster and smaller chips over the long term.
Instead, Swan guided Intel toward minor acquisitions, divestments of non-core businesses, CPU price reductions, and big buybacks -- all decisions which are arguably geared toward shorter-term financial gains instead of a longer-term expansion.
Intel's dividend is safe for now
Intel's customers should continue placing orders -- albeit at a slower pace -- for new chips throughout the crisis, and its FCF levels should remain stable. Suspending its buyback plan was the right move and will give its dividend plenty of breathing room, so investors shouldn't fret over its future payments.