Shares of Intel (INTC +4.85%) have been under significant pressure this year. The chip giant has lost more than a third of its value on concerns that the company's ambitious expansion plan could stress its balance sheet, which might impact its ability to maintain its high-yielding dividend. That slumping stock price has pushed Intel's dividend yield over 4%, well above the S&P 500's 1.5% yield.
Intel's higher dividend yield suggests it's at higher risk of a reduction if it runs into financial trouble. However, that risk is much lower following the company's recent partnership with Brookfield Infrastructure (BIPC +0.00%)(BIP +0.44%) to help fund half the cost of two new fabrication factories. That smart move puts the tech giant's payout on a much firmer foundation.
NASDAQ: INTC
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Heavy investments in its future
Intel is investing heavily to expand its manufacturing capacity to stay ahead of the competition and capitalize on the growing semiconductor demand. Chip sales are on track to double by the end of the decade to top $1 trillion. That's leading the company to invest $30 billion to build two new fabrication plants in Arizona. It could also spend upwards of $100 billion each to construct new manufacturing complexes in Ohio and Germany. Intel expects the initial spending on the Ohio plant to be $20 billion and another 30 billion euros ($30 billion) in Germany.
While Intel generates a lot of cash, that's a hefty financial commitment for the company, especially considering its big dividend. Intel has already paid out $3 billion in dividends this year, less than half the $6.7 billion of net cash it produced by operating activities. However, the company's massive capital program will cost $23 billion this year, and its adjusted free cash flow will be a negative $1 billion to $2 billion this year. That cash burn has some investors wondering if Intel can maintain its dividend during this heavy investment period.
NYSE: BIPC
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Bringing on a smart partner
Intel took a huge step to address those dividend concerns by unveiling a first-of-its-kind semiconductor co-investment program (SCIP) to help fund two new chip factories it's building in Arizona. Its partnership with Brookfield Infrastructure will see the two companies invest up to $30 billion in the project, with Brookfield financing 49% and Intel the remaining 51%. Intel will retain majority ownership and operating control of the facilities while they will split the revenue.
The partnership with Brookfield will increase Intel's financial flexibility. It will protect the company's cash balance and debt capacity for future investments. The tech giant also expects the deal to benefit its adjusted free cash flow and be accretive to its earnings per share during the construction and ramp phase. Intel thus believes it can continue funding a healthy and growing dividend.
Brookfield Infrastructure is an excellent partner for Intel. The company has a long history of partnering with companies by becoming a co-investor to provide funding for large-scale expansion projects. That allows Intel to tap into Brookfield's access to capital to help finance a significant portion of the costs of building these two factories.
The deal will serve as a blueprint for other SCIP transactions that Intel hopes to complete in the future to help fund the buildout of factories in Ohio and Germany. Intel hopes these deals and other programs will help offset 20% to 30% of its annual capital spending. That will free up capital for other purposes, like growing its dividend.
Intel's high-yielding dividend is looking a little safer
The market has been growing concerned that Intel might be unable to maintain its dividend during its current manufacturing capacity expansion phase. Intel is working to address those concerns by lining up funding partners to help cover some of that cost. While its deal with Brookfield doesn't guarantee Intel can maintain its dividend, it certainly puts the payout on a much firmer foundation. It shows that the tech giant is serious about maintaining and growing its big-time payout amid the buildout.
