Intel (INTC -0.38%) is struggling these days. That was abundantly clear in the semiconductor giant's fourth-quarter results. Revenue plunged 32% to $14 billion -- and was at the low end of its guidance range -- and fell 20% for the full year. Meanwhile, earnings and cash flow were also down sharply.
These brutal financial results have weighed on the company's stock price. It has shed nearly 50% of its value from its peak early last year. That has driven up its dividend yield past 5%. While that big-time yield likely looks appealing to income-focused investors, the company's payout could be in trouble if market conditions worsen.
Burning through cash
Intel produced $7.7 billion of operating cash flow during the fourth quarter. That was enough to cover its net capital expenses of $4.6 billion, enabling it to produce $3.1 billion of adjusted free cash flow. This provided Intel with more than enough money to cover its $1.5 billion dividend payment during the period.
However, the full-year numbers painted a bleaker picture. Intel generated negative $4.1 billion of adjusted free cash flow for the year, which was at the low end of its guidance range. The company's cash burn would have been even worse if it didn't shift $3 billion of capital spending from the fourth quarter into 2023. Meanwhile, its full-year total was well below the negative $1 billion to $2 billion of adjusted free cash flow the company initially expected for 2022.
With the dividend costing Intel $6 billion last year, it burned through even more cash. As a result, its total cash and short-term investments have declined by about $1 billion, while total debt has increased by $4 billion. On a more positive note, Intel still has over $28 billion of cash, equivalents, and short-term investments against $42 billion of debt.
However, the company remains in a heavy investment phase to support its IDM 2.0 expansion strategy that will run through next year. With revenue expected to be under pressure again this year, Intel now expects its adjusted free cash flow to be below its guidance of being neutral in the first half of 2023 and improving in the second half. That's despite the capital offsets from its innovative partnership with Brookfield Infrastructure, which is funding 49% of the $30 billion investment for two new chip factories in Arizona.
Can Intel maintain its dividend?
Given the company's deteriorating situation, an analyst on the quarterly conference call asked whether the dividend was in trouble. CFO Dave Zinsner answered:
Well, obviously, we announced a $0.365 [per share] dividend for the first quarter. That was consistent with the last quarter's dividend. I'd just say the board, management, we take a very disciplined approach to the capital allocation strategy, and we're going to remain committed to being very prudent around how we allocate capital for the owners. And we are committed to maintaining a competitive dividend.
These comments give Intel some wiggle room around the dividend. Saying that the company plans to maintain a competitive payout differs from stating that it intends to maintain the current payout rate. With the S&P 500's dividend yield around 2%, maintaining a competitive dividend could imply a payout at or above that level.
That's not to say Intel will cut its dividend. The company affirmed its payout last year when it signed its partnership with Brookfield. At the time, Intel said the partnership would "enhance the company's strong balance sheet by allowing Intel to tap into a new pool of capital below its cost of equity while protecting its cash and debt capacity for future investments and continuing to fund a healthy and growing dividend."
However, market conditions have deteriorated significantly since then, which might cause Intel to adjust its capital allocation strategy. On a more positive note, the company believes its investment strategy will pay off in the future. Zinsner stated on the call that those investments in its IDM 2.0 strategy position the company for "long-term growth in a market expected to reach $1 trillion by 2030." He later commented, "The opportunity for strong revenue growth across our business unit portfolio and free cash flow at 20% of revenue remains." Those future cash flows should enable Intel to support an attractive dividend.
Not a vote of confidence
The future of Intel's dividend is murky. On the one hand, the company is burning through cash to support its IDM 2.0 strategy, which will continue this year. Meanwhile, the CFO's comments about the dividend's future seemed open to interpretation. On the other hand, it does have a strong cash-rich balance sheet, which could allow the company to maintain its payout during this heavy investment phase. However, given the increased uncertainty, Intel isn't the best stock to buy for investors who need a reliable source of income.
