Intel’s Dividend Cut Frees Up Cash for IDM 2.0 Strategy but Execution Risk Remains Palpable

On Feb. 22, Intel INTC announced its board of directors decided to reduce its quarterly dividend by about two thirds to $0.125 per share from $0.365 per share. The firm has been plagued by weak PC demand, competitive pressures from a resurgent AMD, and ongoing execution issues that have culminated in market share loss and margin compression. Although we still support Intel’s IDM 2.0 strategy to fix its manufacturing, we view this dividend cut as necessary given the material capital expenditure requirements of its turnaround plan. Intel’s dividend yield had risen north of 5% before the cut, which would have been tough to maintain given its weaker cash flow generation in the near term. We estimate Intel’s capital expenditures will amount to at least $20 billion in 2023. Longer term, we expect the firm’s net capital intensity to be about 30% of sales. The firm’s roughly $6 billion in dividend payouts was valuable cash that we think is better served by being put toward investments in new process technologies and R&D.

We are maintaining our fair value estimate of $35 per share. While shares of narrow-moat Intel are undervalued relative to our fair value, we believe narrow-moat AMD ($115 fair value estimate) looks more attractive at current levels given our expectations for strong share gains in the data center CPU market despite softer macroeconomic conditions.

Management reiterated its outlook for the first quarter, with revenue at a midpoint of $11 billion and GAAP gross margins of 34.1%. The firm sees $3 billion in cost savings in 2023 and is targeting annualized savings of $8 billion to $10 billion by the end of 2025, which includes headcount reductions, cuts to marketing budgets, exiting noncore businesses, and a temporary reduction to compensation and rewards programs for employees and executives. The danger with some of these actions, in our view, is that Intel will underinvest in key areas while risking the loss of top engineering and chip design talent.