3 Reasons Intel Corporation’s Dividend Is in Serious Trouble

Even an improving PC market may not be enough to save Intel's dividend.

Chad Henage
Chad Henage
Apr 22, 2014 at 3:00PM
Technology and Telecom

Many Intel (NASDAQ:INTC) investors are very pleased with the company's most recent earnings results. In fact, there have been several stories suggesting that the PC industry is recovering and speculating on how Intel's fortunes may potentially improve. However, even with recent improvements, there are at least three reasons investors need to keep a close watch on Intel's dividend situation.

A 3.5% increase might not be enough
According to research firm Gartner, traditional PC and laptop sales are predicted to decline over the next year. However, that really isn't the whole picture. If you add PC and laptop sales to hybrid sales, the total is actually expected to increase by about 3.5% on a year-over-year basis.

While a 3.5% increase sounds like good news for Intel, this is actually the first reason Intel's dividend is in trouble. In Intel's current quarter, the company's PC client group reported that, while notebook volumes increased by 2%, desktop volumes were flat.

By comparison, ARM Holdings (NASDAQ:ARMH) reported a 16% increase in chip shipments, and Qualcomm (NASDAQ:QCOM) reported shipping 17% more devices. This is a key difference between Intel's position and its mobile-focused competitors. Intel still gets more than 60% of its revenue from PC sales and more than 66% of its operating income from profitable divisions.

The much larger problem is that Intel wants its future to be mobile, yet this division is dying on the vine.

25% into the year and at less than 13% of goal
One of Intel's goals for the year is to ship at least 40 million tablet chips. The company was quick to point out that it shipped 5 million of these chips in the last three months. The second reason Intel's dividend is in trouble is that this figure represents less than 13% of the company's goal for the year.

Given that both ARM Holdings and Qualcomm are heavily mobile-focused, Intel needs to worry about its future in the mobile space. Intel's mobile and communications group is a black hole of revenue and profitability.

This division alone accounted for an operating loss of over $900 million, and revenue declined by more than 60% year-over-year. Compared to the 15% annual revenue growth at ARM Holdings, or the 10% revenue growth from Qualcomm, Intel's mobile aspirations look like a very big challenge indeed.

This former cash king is being kicked off the throne
Many investors might point to the fact that Intel has billions of dollars in cash and investments. However, the company also carries over $13 billion in long-term debt. Net cash and investments at Intel are actually less than $5 billion, which is down more than 20% compared to last year.

In the past, Intel's free cash flow was so substantial that the company's dividend payout wasn't even a thought in many investors' minds. This is the third and most pressing problem facing Intel's dividend; between the huge competitive challenges facing Intel, and the company's aggressive dividend policy, investors have a new worry.

In the last three months, Intel's core free cash flow (net income + depreciation – capex) was about $980 million. By comparison, the company paid about $1.1 billion in dividends during this same time frame, giving the company a payout ratio of 112%.

Looking at ARM Holdings' core free cash flow payout of 29%, or Qualcomm's payout of 30%, Intel's payout looks problematic. While neither company's dividend yield is as impressive as Intel's, a high yield doesn't mean much if it's not sustainable.

Foolish final thoughts
The bottom line is Intel is a well-known technology name, yet the company's future is highly uncertain. While the future of the PC, hybrid, and tablet industry will certainly change Intel's future, the company's cash flow issues are a very present issue.

Investors can't afford to ignore the warning signs. Unless Intel makes some major changes, the company's dividend is far less stable than many might think.