Intel (INTC 1.71%) might have just had one of the worst years in the history of blue chip stocks.
The Dow Jones Industrial Average component and one of the biggest semiconductor companies in the world finished 2022 with a 20% decline in revenue to $63.1 billion. During the year it lost $9.4 billion in free cash flow and the stock price fell nearly 50%. Even worse, Intel expects to report a loss in the first quarter of 2023 and is projecting revenue will fall 40%, year over year.
The chip maker isn't entirely to blame for the weak numbers. An inventory glut in the semiconductor industry, especially in PC chips, hammered peers like Advanced Micro Devices and Micron Technology as well, and a decline in PC demand is also weighing on performance. The chip sector is known for being cyclical, and prices can swing wildly.
Intel has underperformed its peers for several years, consistently losing market share to AMD. It's struggling to grow at a time when much of the sector is booming, and the company's latest decision shows why that struggle will likely continue.
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Intel management makes some changes
After its dismal performance in 2022, the company is now cutting costs. It's laying off employees, cutting salaries for mid-level positions and up, trimming 401(k) contributions, and suspending any quarterly performance bonuses, though annual performance bonuses will remain.
Given the company's recent performance, the layoffs and salary cuts seem to make sense, but there's another area that would seem to be a more natural place to save money. The company currently spends $6 billion a year on its dividend, a normal form of profit-sharing. But there's a catch here. Intel isn't profitable. Based on its Q1 guidance and the broader malaise in the chip sector, it doesn't look like it's going to be profitable on a cash basis anytime soon, especially when it's planning to invest up to $100 billion in new manufacturing plants.
Management was asked about the dividend on the recent earnings call. Here's what CFO David Zinsner had to say:
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.
Some investors might appreciate that commitment as Intel does offer a sizable 4.9% dividend yield at the moment, but Intel's track record says otherwise, as the stock hasn't gone anywhere in 20 years. This also isn't the first time the company has prioritized the dividend over fundamental investments in the business. Back in July, the company reaffirmed the payout but said it would cut its capital expenditures by $4 billion, which is likely to come out of semiconductor fabrication plant (fab) production.
Intel is putting the cart before the horse
Intel's decision to prioritize its dividend over maintaining salaries feels like shareholder theory taken to its worst extreme.
Smart managers know that building a successful business starts with taking care of your employees, who in turn take care of your customers, who buy your product, thereby rewarding investors with a profit. Continuing to pay a dividend while the company is losing nearly $10 billion a year and falling behind the competition is entirely backward. Intel's top competitor, AMD, doesn't even pay a dividend, which puts Intel at an even greater competitive disadvantage as long as it's committed to paying $6 billion a year that it isn't earning.
Intel isn't about to run out of money. It has roughly $28 billion in cash and short-term investments, but it holds $42 billion in debt, and its cash balance is likely to be depleted further in 2023.
Cutting salaries and taking away bonuses is also likely to weigh on morale and could damage Intel's reputation in the workforce over the longer term. Given the company's already weak position and its decision to favor rewarding shareholders over investing in the business, the stock seems likely to languish over the coming years.
