Shares of chip giant Intel (INTC +1.75%) soared on Friday after the company laid out plans to aggressively cut costs. Not only is the PC market imploding following a pandemic bonanza in 2020 and 2021, with global unit shipments tumbling 19.5% year over year in the third quarter, but Intel is also seeing demand for server chips from enterprise and cloud customers soften.
The plan is to slash costs by $3 billion in 2023 and grow the annualized cost reductions to between $8 billion and $10 billion by the end of 2025. That's a huge cut. For perspective, Intel expects its total revenue this year to be around $64 billion.
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This cost-cutting comes as Intel continues to invest aggressively in manufacturing as it builds its own third-party foundry business and attempts to launch five process nodes in a four-year period. The plan is to keep free cash flow at roughly breakeven throughout this investment cycle. For that to happen now that demand has deteriorated further, cost cuts are necessary.
There has been no talk of cutting the dividend to free up cash so far, but given the state of Intel's core markets and the chance of a global recession next year, dividend investors should certainly be feeling a little nervous. What are the odds that Intel cuts its dividend?
The good news: Intel probably won't need to cut the dividend
The scope of Intel's cost-cutting plans, which include layoffs, portfolio cuts, more aggressive cost controls, and improved sales and marketing efficiencies, will help the company keep its free cash flow from falling too deeply into the red. For this year, free cash flow is expected to be a loss of between $2 billion and $4 billion.
Assuming Intel succeeds in not burning through too much cash, the balance sheet is fully capable of supporting the dividend for the time being. At the end of the third quarter, the company had $24.5 billion of cash and investments along with $39.5 billion of debt. Dividends eat up approximately $6 billion in cash each year, so a few years of dividend payments without any free cash flow is certainly doable.
Free cash flow will rebound once Intel completes its current investment cycle and reduces its capital spending. Intel's manufacturing push is a multi-year effort, so investors can expect elevated capex for at least a few years. A rebound in sales of PC and server chips will also help. While end market demand may remain weak for a while, once Intel's customers finish reducing their own inventories, Intel's sales will better align with actual end market demand.
If one of Intel's priorities is to maintain the dividend, it can certainly do that.
The bad news: There are no guarantees
Although paying its current dividend isn't an issue, that doesn't mean the company won't look to free up some cash by cutting or even suspending the dividend. Intel's future depends on it regaining its manufacturing edge, both to give its own chips an edge and to effectively compete with TSMC in the foundry business.
Doing so will be expensive. While the company has reduced its capex plans for 2022 by a couple billion dollars to react to lower demand, it set plans earlier this year to pour around $60 billion cumulatively into capex during 2023 and 2024.
Intel does have options beyond tapping the dividend for additional cash. In August, the company partnered with Brookfield Infrastructure to help fund the cost of two new chip factories in Arizona. Brookfield will supply 49% of the expected $30 billion price tag, allowing Intel to bring new capacity online without needing to fund the entire project itself.
My guess is that Intel will turn to this model of financing again over the next few years if it needs to fill any funding gaps. For that reason, I think it's likely that Intel maintains its dividend. Don't expect any kind of dividend increase -- anything more than a token increase probably isn't going to happen until 2025 at the earliest. But Intel has enough options on the table to keep those dividend dollars flowing to investors.
