WILL A SAFER CHIP SUPPLY MEAN SAFE PROFITS FOR INTEL INVESTORS?

By Maen Soufi, Equity Analyst 

Among the most concerned spectators of Russia’s invasion of Ukraine are the many American corporations reliant on Taiwan’s production of semiconductor chips. The COVID-19 pandemic and the subsequent supply chain disruptions and import shortages previously exposed America’s reliance on certain imports, among them semiconductor chips. Entering the pandemic, Taiwan was responsible for 63% of global semiconductor production. Putin’s undeterred assault in Ukraine has warning bells ringing from the island in East Asia to the US, with fears that China could be empowered to begin a similar incursion to capture Taiwan. The Chinese Communist Party has maintained that the island is an integral part of Chinese territory since assuming control of the mainland in 1949. The persistent threats to access to Taiwan’s semiconductor chips have motivated several efforts in the last year to secure availability of these chips domestically.

Among the players involved in US semiconductor chip manufacturing is Intel (NASDAQ: INTC). Lately, Intel has announced plans to build a “mega factory” in Germany dedicated to producing chips. This follows a $20B investment to build what could become the world’s single largest chip manufacturing plant in New Albany, Ohio. The Ohio plant puts Intel in pole position to benefit from the $52B in subsidies expected to come from Congress’ competitiveness legislation, with both the House and Senate having passed versions of a bill intended to boost semiconductor production and allow American companies to compete with China across research and technology. This legislation follows the 25% tariff on Chinese semiconductors introduced by the Trump administration in 2018. Intel also filed last week to have Mobileye, its autonomous automotive subsidiary, spun-off and taken public, at a time when market volatility and international tensions have prompted other companies to change their plans to go public. With this influx of recent activity, I wanted to figure out what investors can expect for the future of Intel’s dividend payments.

Intel’s Dividend History

Intel, currently trading at $45, has paid out a dividend every quarter since 1992 – a 28-year period. Intel’s quarterly dividend for this year is $0.365, having grown 5% from last year. This comes out to an annual yield of 3.19% at the time of announcement, up from 2.23% yield at the same time last year, but roughly the same as what the company has paid out over the last 10 years. Investors who have held Intel over this period are likely to have been very satisfied with the consistency of payments and overall yield of Intel’s dividends relative to its stock price. While the yield has been consistently strong, the annual growth rate of Intel’s dividend over the last 10 years is only 5.2%. Investors looking for a stock that they can expect will grow their dividend may find more suitable investment opportunities, but investors looking for consistent yield will find confidence in Intel’s dividend history.

What Do We Expect for the Future of Intel’s Dividends?

Likely more of the same. Intel management has forecasted the next several years, and the period from 2022-2024 has been described as their ‘Investment Phase.’ What we are looking for now is to see if Intel will make better and more efficient use of its free cash. Last year, Intel halted stock buybacks after a number of unsuccessful initiatives. The decision to pursue buybacks at all over that time was questionable to begin with. While Intel’s free cash flows were strong ($20.9B in 2020 up from $16.9B in 2019), I wonder why they chose to spend so heavily on buybacks rather than reinvesting in R&D and manufacturing capabilities, as competitors TSM and AMD have widened their advantages over Intel in smaller chips and CPUs. I like seeing that Intel is once again committed to expanding its manufacturing in the US and Europe, although the large investments will mean that dividend growth beyond expectations and future buybacks are very unlikely. Intel is competing in a very capital intensive business, and for the next few years, the American tech giant will be forced to play “catch up,” making the big investments that it should have made years ago. 

Q4 2021 Earnings Report and Guidance

In the last fiscal quarter, Q4 2021, Intel exceeded expectations for both revenues and earnings. Revenues came in at $20.5B vs $19.2B expected, while earnings per share were $1.13 vs $0.78. Revenues and earnings were up 3% and 1% year over year, respectively. Investments in manufacturing capacity improvements reduced free cash flows by 54% from 2020 to $9.7B in 2021, which is a typical figure when compared to the last 10 years of Intel’s operations.

In its guidance for 2022, Intel describes its goal of hitting 10-12% year over year revenue growth by 2026. They see big opportunity in the expected $1T market by 2030 for semiconductors stimulated by continued reliance and proliferation of technology. They give a lot of attention to the fact that their production capacity is not where they want it to be, and the accompanying investments, but not much has been said about how its competitors, relatively small companies next to Intel, are and have been producing chips of increasing quality and more efficiently. If Intel is going to hit its 5-year targets through the semiconductor opportunity, it will need to produce more chips, but also better chips. This won’t come cheap, and it’s not an automatic that Intel’s aggressive investment plans will yield durable competitive advantage. 

Conclusion

At this point, I’m convinced there is an opportunity for Intel, but I wouldn’t say that Intel has convinced me that it will make the most of it yet. For investors, it may seem that the stars are aligning for the company, but its important to remember that competition in this space is brutal. Intel, to its credit, has the resources to develop the infrastructure to become the US’ largest chip producer. And domestic chip producers have never had more governmental support. However, as a growth play, Intel remains somewhat speculative. The stock is not expensive compared to the standards of the last five years, trading at a price to earnings ratio of just 9.6.  Buying to hold and enjoy the regular dividend is fairly safe. But it may be a while before all of these growth oriented investments pay off, if ever. The direction of the company in the last year or so has been optimistic, and I must credit CEO Pat Gelsinger for leading the change of course in Intel’s strategy and putting the company once again in position to take advantage of the epic growth in the semiconductor market. But only time will tell whether Gelsinger’s big investments will pay off.