With the stock market in a precarious position, dividend-paying stocks can offer solace. A nice income stream can provide the cash flows necessary not to need to sell stocks or make opportunistic purchases. One well-known company with a high dividend yield is Intel (INTC 0.68%), sporting a 5.2% yield.
While that's attractive, investors can't just look at a single metric, as Intel's stock has been down 45% since the start of 2022. A falling stock price far outweighs any effects of dividends, but has the stock fallen too far? Or is the current business trajectory bringing the dividend's safety into question? Read on to find out.
Intel's Q4 was bad, and it's only going to get worse
Intel isn't the innovative chipmaker it used to be. It has been beaten to many cutting-edge technologies (3 nm, 5 nm, and 7nm chips) by other foundries, like Taiwan Semiconductor and Samsung. Those losses are starting to show in Intel's results.
In the fourth quarter, Intel's revenue fell 32% over last year to $14 billion. To make matters worse, first-quarter revenue is also expected to fall by 40%.
Coupled with Intel's falling revenue, its margins are also being decimated.
| Margin | Q4 2021 Level | Q4 2022 Level |
|---|---|---|
| Gross Margin | 53.6% | 39.2% |
| Operating Margin | 24.3% | (8.1%) |
| Profit Margin | 22.4% | (4.7%) |
Source: Intel.
That's an ugly picture, and Q1 guidance isn't looking any better; gross margins are expected to come in at 34.1% with a profit loss margin of 30%.
However, CEO Pat Gelsinger made it clear that Intel was on a "multiyear journey" and not to get too caught up in short-term results. Management also outlined its plan to create $3 billion in cost savings in 2023 and expects to generate $8 billion to $10 billion by 2025. However, when you're guided to lose over $3 billion in Q1, that cost savings won't do anything.
Intel's business is currently struggling. But is its dividend its saving grace?
The dividend is being prioritized by management
In 2022, Intel paid out $6 billion in dividends to investors. That dividend will come under scrutiny as Intel transitions to a cash-burn state (in Q4, Intel had a negative free cash flow of $4 billion). With $11.1 billion in cash and $17.2 billion in short-term investments, Intel has plenty of cash to continue funding the dividend. But is that the best use of capital?
Many (including myself) might argue that the money is better spent improving Intel's technology and pursuing future developments instead of paying investors. But management doesn't see it that way. CFO Dave Zinsner stated that the company is "committed to prudent capital allocation" and "maintaining a competitive dividend."
It sounds like the dividend will be the last thing to be cut, which is a mistake in my eyes. But they have stated their priorities and will reap the rewards (or consequences) in the future.
Intel's stock is also quite expensive.
INTC PE Ratio data by YCharts.
If you only look at the trailing price-to-earnings (P/E) ratio, you might think it looks dirt cheap. However, when you utilize 2023 earnings projections, the stock is pricey.
So to answer the headline question: Is the dividend safe? I'd say yes because management values it highly. But the more important question is: Is the stock safe? To that, I'd say no. Intel's stock likely has a more significant downside than the 5.2% dividend yield can bolster, which is a money-losing proposition.
There are much safer (and more profitable) companies in the chip space, and you should consider them before Intel.
