Source: PaxForex Premium Analytics Portal, Fundamental Insight
In the eyes of some investors, the last good reason to own Intel has disappeared. Management cut its quarterly dividend from $0.365 to $0.125 to fund its long-term strategy, reducing the yield from 5.8% to just 2%.
Is Intel stock worth owning after the catalyst is gone? Let's try to find out.
Another interesting thing about the dividend story is that less than a month ago CFO Dave Zinsner was asked about dividend safety at the company's quarterly shareholder meeting. He said that Intel was "committed to maintaining a competitive dividend" and that it was taking a "disciplined approach to its capital allocation strategy."
Cutting the dividend so soon after that statement does not reflect well on the company's management.
But the dividend cut was necessary. Intel suffered a $700 million loss in the fourth quarter, which was caused by a 32% drop in revenue. This means that Intel used its cash reserves to fund the dividend, which is not a sustainable strategy.
Gross margins also fell from 54% last year to 39% in the fourth quarter, indicating that Intel had to cut prices to reach revenue levels. Another cause for concern is the 12-month drop in gross margin: It is now at a 30-year low for the company.
A major factor in the evaporation of demand is the terrible PC market. First, the economic outlook is not good, so consumers are in no hurry to upgrade their electronics. Second, many consumers upgraded their PCs during the last few years, during the pandemic. Both factors led to lower demand for PCs, which hit Intel's finances.
The first quarter of 2023 doesn't look any better, with executives projecting revenues of about $11 billion, down 40% from 2022's $18.4 billion (for comparison, first-quarter 2022 revenues are down 7% from 2021).
Clearly, Intel's short-term prospects won't improve, but is there hope for long-term shareholders?
One of the points Intel addressed in its dividend cut announcement was its cost-cutting initiatives. The company intends to save $3 billion in operating expenses by 2023 and $8 to $10 billion annually by 2025.
According to the company, this will be done through "reductions in compensation and employee and executive incentive programs." According to the Neowin website, this includes at least a 5 percent company-wide pay cut, suspension of bonuses, and reductions in 401(k) benefits.
However, a company's employees are some of its most important resources. If you treat them right, you will get the most out of them. Unfortunately, cutting operating expenses in this way may look good on the quarterly report, but it can poison the workplace culture and affect future results.
Intel is also spending a lot of money on its chip plant in Ohio: a $20 billion investment that could potentially grow to $100 billion. While I'm in favor of moving chip production back to the U.S., Intel may have to reduce the size of the plant or its capacity to properly size the building to accommodate declining demand, as Intel's drop in gross margins points to an oversupply.
If you want to own a chip company, the advice is not to look at Intel. It`s doing worse than its competitors, and since the company is lagging behind in developing advanced technologies such as 3- and 5-nanometer chips, it doesn't have many compelling reasons to own the stock, especially after dividend cuts.
As long as the price is above 25.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 25.24
- Take Profit 1: 29.00
- Take Profit 2: 31.00
Alternative scenario:
If the level of 25.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 25.00
- Take Profit 1: 26.00
- Take Profit 2: 20.00
