Last week, Intel (NASDAQ:INTC$Intel(INTC)$ ) reported its full year results for fiscal 2022 as well as results for the fourth quarter – and results were terrible. It is probably an exception that the CEO admits how terrible the results are, butPat Gelsinger kicked off theearnings callwith the following statement:
We made meaningful progress on several fronts in calendar year 2022, notwithstanding all the challenges, but we readily admit our results and our Q1 guidance are below what we expect of ourselves. We are working diligently to address the challenges brought on by current demand trends and remain confident in our long-term plans and trajectory.
In the following article we will look at the annual results in more detail and analyze the implications the results will have. And when looking at the articles that were published immediatelyafter earnings were released, the verdict of Seeking Alpha contributors was clear: Sell the stock! In the meantime, we already saw some bullish articles and in the following article I will also take the contrarian role once again and argue that Intel is a solid long-term investment. I will also look at the safety of the dividend, but we will start by looking at the downside risk the stock might have in the short-term.
Dividend
Another issue that might be problematic is the dividend. Management declared a quarterly cash dividend of $0.365 per share for the first quarter of fiscal 2023 – in line with the dividend in the previous four quarters. According to the pattern in the last few years, one could have expected a raise this quarter. Instead, during the earnings call the question was raised how stable the dividend is and if investors should expect a dividend cut. When asked about the dividend, CFO David Zinsner made the following statement:
Yes. Well, obviously, we announced a $0.365 dividend for the first quarter. That was consistent with the last quarter's dividend. I'd just say the Board, management, we take a very disciplined approach to the capital allocation strategy, and we're going to remain committed to being very prudent around how we allocate capital for the owners. And we are committed to maintaining a competitive dividend.
Now one can ask what a competitive dividend is. We could interpret the statement in a way that Intel is committed to keeping the dividend stable. But we could also interpret the statement in a way that Intel is aiming to have a similar dividend yield as its peers and most of the company’s peers have a much lower dividend yield.
On the other hand, it would be very weird if management is determining its dividend by looking at the dividend yield (compared to peers) as the high dividend yield of Intel is rather the result of the steeply declining share price and not because Intel raised the dividend so aggressive in the last few years.
In fiscal 2022, the company had to pay $5,997 million in dividends. However, in fiscal 2022, the free cash flow of Intel was negative, and it probably would have been wise not to pay a dividend at all. When comparing the dividend of $1.46 to earnings per share of $1.94 in fiscal 2022, we get a payout ratio of 75% which is rather high. In the past ten years, the payout ratio was about 38% and in almost every quarter below 50%.
To be honest, I don’t have a clear opinion about Intel’s dividend. In general, I don’t want management to stick too hard to a dividend (and especially not to fight for the status of a dividend aristocrat at all costs). In the case of Intel, I would expect 2023 to be similarly difficult as Intel will continue to have extraordinarily high capital expenditures. But as long as the free cash flow improves again in fiscal 2024, Intel could probably maintain its dividend at current levels.
Balance Sheet
One could also argue that Intel has enough liquid assets on its balance sheet to finance the dividend. And with $11,144 million in cash and cash equivalents as well as $17,194 million short-term investments on December 31, 2022, the dividend is easily covered. However, it is a really bad idea to pay the dividend with cash from the balance sheet in my view.
Especially as Intel also has $4,367 million in short-term debt as well as $37,684 million in long-term debt on its balance sheet. When comparing the total debt to the shareholder’s equity of $103,286 million, we get an acceptable debt-equity ratio of 0.41. When comparing the total debt to the operating income of fiscal 2022, it would take 18 years to repay the outstanding debt. In my opinion, it is rather nonsensical to use the operating income from 2022 as it was exceptional low, and it seems rather unlikely for Intel to be able to generate only such a low operating income in the years to come.
And of course, Intel can use its $28.3 billion in liquid assets to reduce the debt levels and this would be enough to repay two thirds of its outstanding debt. When looking at $18 billion in operating income Intel could generate on average in the last few years, it would take only a little over two years to repay the outstanding debt (not using liquid reserves) which is acceptable.
Annual Results
The reason why we must ask these questions about the downside risk of the stock and the stability of the dividend are the horrible results Intel reported for fiscal 2022 and the fourth quarter.Intel missed expectationsfor earnings per share as well as revenue and the fourth quarter was a huge disappointment.
For the full year, Intel reported an annual revenue of $63,054 million and compared to $79,024 million in the previous year this reflects a top line decline of 20.2% year-over-year. Operating income declined even steeper and instead of $19,456 million in fiscal 2021, the company had to report an operating income of $2,334 million – 88.0% lower than the year before. Due to higher gains on equity investments ($4,268 million in fiscal 2022 compared to $2,729 million in fiscal 2021), net income did not decline as steep as operating income. Nevertheless, diluted earnings per share declined 60.0% from $4.86 in the previous year to $1.94 in fiscal 2022. And the adjusted free cash flow for fiscal 2022 was a negative amount of $4,075 million.
When looking at the different segments, we get a mixed picture with some segments reporting great numbers. However, the two segments which are contributing the biggest part of revenue (and especially the biggest part of operating income) had to report a steep decline.
CCG (Client Computing Group), which is responsible for the biggest part of revenue and operating income reported steep declines. In fiscal 2022, revenue declined 22.8% year-over-year to $31,708 million and in the fourth quarter revenue declined even 35.7% YoY to $6,625 million. Operating income for the full year declined 60.0% YoY to $6,266 million and 81.6% YoY in the fourth quarter to $699 million.
The second major segment, which is responsible for a huge part of revenue is DCAI (Data Center and AI Group). And for the full year, revenue declined “only” 15.4% YoY to $19,196 million while revenue in the fourth quarter of fiscal 2022 declined 33.0% YoY to $4,304 million. Operating income declined even steeper – 72.9% in fiscal 2022 to $2,288 million and 84.2% YoY in the fourth quarter to $371 million.
While Intel’s traditional business is struggling, the emerging segments are still increasing and could report solid growth. Especially its Mobileye business segment, which reported high growth rates – 34.8% YoY growth for revenue and operating income increased 24.5% YoY to $690 million. Intel Foundry Services also increased revenue from $786 million in FY 21 to $895 million in FY22, but the segment also reported an operating loss of $320 million.
Guidance, Outlook, Growth
Due to increased macroeconomic uncertainties, Intel is not providing an outlook for full year 2023, but an outlook for the first quarter of fiscal 2023. However, the guidance is not great and during the earnings call, the following statement was made by Pat Gelsinger:
First, on the macro. We expect macro weakness to persist at least through the first half of the year with the possibility of second half improvements. However, given the uncertainty in the current environment, we are not going to provide revenue guidance beyond Q1. Dave will provide guidelines for capital spending, depreciation and adjusted free cash flow in his prepared comments.
And for the full year of fiscal 2023,analysts are expectinglower revenue as well as lower earnings per share. While revenue is expected to decline about 8% to a consensus of $58.14 billion, earnings per share are expected to decline about 11% to $1.64. We all know that semiconductor companies are operating in a cyclical industry and therefore we should not be surprised when cyclicality hits again. In my opinion, we are headed towards a global recession and semiconductor companies are hit in such a scenario.
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