In what is likely not a surprise, Intel (INTC -9.20%) announced last week that it was slashing its dividend by 66%. Declining revenue and net losses likely necessitated this move as it seeks to make a comeback in the industry it created.
However, the semiconductor stock's share price did not fall significantly following the news, indicating that the move wasn't a big surprise and that it might bring relief along with disappointment to shareholders. Also, with the capital the cut frees up now available for other purposes, slashing the payout could benefit Intel in the longer term.
The dividend cut
The Intel dividend cut resolves an issue that has been growing more concerning for some time. Even as financials had deteriorated and the stock price fell, the company continued to hike the payout annually. The previous payout hike took effect in early 2022 and increased the payout by 5%, taking it to a quarterly level of $0.365 per share.
But now, the $1.46 per share annual dividend will fall to a yearly rate of $0.50 per share, or $0.125 per share quarterly. This ends a streak of annual payout hikes dating back to 2013 and represents the first cut in the dividend since 2000.
INTC Dividend data by YCharts.
It also dramatically reduced a yield that was approaching 5.75%. With the cut, the dividend will now offer a return of 1.9%. While that exceeds the current 1.7% yield provided by the average S&P 500 stock, it represents a massive decline and probably dashes the hopes of investors who owned this stock primarily for the dividend.
Why it happened
Those who watched Intel closely know the dividend took a toll on the company's financials, especially with the current downturn in the industry. In 2022, revenue fell 20% to $63 billion amid an atrocious PC market. This caused net income to drop to $8 billion, including a $664 million loss in the fourth quarter. Even worse, free cash flow, which exceeded $11 billion in 2021, fell to a negative $4 billion.
With that turnabout and the $25 billion Intel spent on property and equipment in 2022, attention naturally turned to the dividend, which had cost the company about $6 billion annually.
Why it may help Intel
Even though it will take more than a dividend cut to right its ship financially, it should give Intel about $4 billion per year to direct toward other purposes. Those "other purposes" include foundry construction in Arizona and Ohio, amounting to $20 billion in each state. It also plans to spend 80 billion euros ($85 billion) in Europe over the next decade, meaning the company needs capital wherever it can find it.
Intel has made this push in a bid to catch up with chip-making giants Taiwan Semiconductor Manufacturing (TSMC) and Samsung. Given Intel's product launch delays in recent years, it is unlikely to fully meet this goal, at least in the near term. Still, the strategy likely holds appeal in a market that has become uncomfortable with approximately two-thirds of the world's third-party chip production happening in Taiwan.
Additionally, it remains an essential player in the chip industry. Even at the lower $63 billion annual revenue, it is the world's third-largest chip company behind TSMC and Samsung. Moreover, with that massive presence, it continues to dominate the server processor market, though Advanced Micro Devices has made significant market share gains in recent quarters.
Also, amid its struggles, Intel has become very cheap by one critical measure. It currently trades at just 1.04 times its book value, pricing the company for little more than its assets minus liabilities. This implies that its business and intellectual properties carry little additional value -- an unlikely prospect, considering its size and influence in the semiconductor industry.
Should I buy Intel?
The dividend cut is both a disappointment and a relief for some investors and ends a two-decade trend of increasing payouts. It also confirms the state of Intel's finances as it turns to losses and embarks on a costly comeback.
However, Intel continues to wield considerable power in the industry. Given the company's investments, its bid to catch up will likely succeed, at least to some degree. And with the stock selling for barely above book value and a dividend that offers an above-average yield, investors may want to consider adding shares now.
