Intel, one of the most important companies in its field, seems to be caught in the middle of bad decisions.
The company has begun a process of downgrading labor conditions and cutting important investments.
The priority for the board of directors is the payment of high dividends to investors.
As feared, Intel shares are not expected to show the best results in 2023. According to experts from specialized portals, the company is not taking the right measures for its long-term development. Among the company’s mistakes, the one that stands out is that of prioritizing the delivery of dividends to shareholders.
The problem itself is not the delivery of dividends to its investors, which in normal conditions benefits any company. The issue that fills analysts with concern is that the maintenance of these high dividends is at the expense of workers’ conditions. Recently, the board of directors announced a program of cost cuts, among which minimizing employees’ extra income stands out.
This is bad news not only for the people who depend on it, but also for the reputation of the company itself. This is not just any company, but one of the most important worldwide in the area of chips and computers. The fact that conditions in this market are not the best should not be overlooked. However, the performance of this company would be well below the average in its field.
Intel’s stock will not be doing well in 2023
As Investor Times has already reported, Intel stock hasn’t had the best time since early 2022. As a result, the company’s business model, coupled with adverse macroeconomic conditions, led to an unconscionable pullback in the firm’s earnings.
The semiconductor heavyweight ended 2022 with an approximate -20% drop in revenue to $63.1 billion. Similarly, in the same period it lost some $9.3 billion in free cash flow. At the same time, its share price fell by no less than -50%.
Although it is undeniable that the semiconductor sector is going through a terrible time, it is also undeniable that the company is not taking the best path. According to the specialists of the aforementioned media, the company is moving in the opposite direction to its rivals in terms of business model. Meanwhile, the bad moment looks set to last for the rest of this year, and in the long term, they explain, the future is not looking very bright.
But the worst is not over for Intel’s revenues and shares. The company itself expects a considerable setback for the first quarter of 2023. They also project a year-on-year drop of -40%. One should not lose sight of the fact that market conditions are not the most optimal. Hence, the blame for its situation cannot be placed entirely on the company.
The state of the industry and Intel’s mistakes
As mentioned at the beginning, the difficult market conditions combined with the company’s bad decisions are the two major factors. In the first case, it should be noted that the competition has also been going through a bad time. Such is the case of Advanced Micro Devices (AMD) and Micron Technologies.
These two companies have seen their revenues decimated due to the fall in demand for computers. Macroeconomic conditions have made the chip market one of the most volatile. As such, companies in the sector are the first to experience the negative effects.
As for the second case, i.e. the one concerning the company’s mistakes, there is much to highlight. Over the past few years the company has underperformed its rivals, leading it to lose ground to AMD. Even in periods of industry revenue growth, the company struggled desperately to remain profitable. In that sense, all indications are that this fight will continue for the next few years.
After a catastrophic 2022, the company’s management employed cost-cutting mechanisms. These consist of employee layoffs, salary cuts for mid-level positions and the suspension of quarterly bonuses. However, one of the most criticized measures is that of cutting retirement or 401(k) contributions. Among all the benefits workers used to have, now only the annual performance bonus remains.
All this has a direct impact on Intel’s shares, which do not look like the best option to invest capital at the moment.
Cost-cutting and dividends
The fact that a company is cutting costs is not to be criticized, especially if it is seeking to overcome adverse market conditions. In fact, a significant number of companies are implementing staff cuts, hiring freezes and other austerity measures. The issue with Intel is that this firm seemed to have more options for cuts, but opted for the most problematic one.
Thus, instead of pursuing labor pauperization measures, the company could have applied its cuts in the area of dividends. The company spends $6 billion annually on dividend payments to stockholders. This is a normal way for many companies to share profits. But the problem with Intel is that it is not a profitable company considering the projected results for the first quarter and the situation in the semiconductor market.
Putting those factors on the table, it is safe to say that the company will not be profitable in the near future. The latter becomes especially important considering the fact that the firm plans to invest $100 billion in the creation of two manufacturing plants. With high and unchanged dividends and slowing revenues, it is safe to assume that Intel’s stock will not do well in the future.
During the earnings call, the question about dividends could not be missed. Intel CFO David Zinsner was emphatic when touching on that topic:
“I would just say that the board, management, we take a very disciplined approach to capital allocation strategy, and we will remain committed to being very prudent in how we allocate capital for owners. And we are committed to maintaining a competitive dividend,” he said.
A company tradition
It should not be lost sight of the fact that this is not the first time the company has prioritized dividends over core sectors. During July 2022, the board reaffirmed the payout, but stated that it would reduce its capital expenditures by $4 billion. The negative aspect of this is based on the fact that this cut was billed to the production of the semiconductor creation plant.
Aware of this behavior, Motley’s analysts state that Intel is “putting the cart before the horse.” They add that the decision to put dividends ahead of labor interests takes investor theory to its worst extreme.
The portal sentences:
“Smart managers know that building a successful business starts with taking care of their employees, who in turn take care of their customers, who buy their product, thus rewarding investors with profits. Continuing to pay a dividend while the company loses nearly $10 billion a year and lags behind the competition is completely backward.”
The actions of Intel’s main competitor, AMD, make clear the missteps of Intel’s business strategy. AMD does not pay out a penny in dividends, which puts Intel at a disadvantage. In other words, this means that Intel has to take out $6 billion annually that it does not generate, while AMD saves it to invest in key sectors.
Many investors see no problem with such juicy dividends (4.9%). However, one should not overlook the fact that over the past 20 years Intel’s stock has not been an outstanding performer.
All of this context does not at all suggest that Intel is going to run out of money. In fact, the company retains some $28 billion in cash and short-term investments. Despite this, its debt is $42 billion and its cash balance could decimate further this year.
Either way, benefiting shareholders over the interests of the company’s own employees does not leave the company in a very good light. Considering its prestige in the technology sector, this becomes a negative omen, as many workers would lose respect for it. Thus, the reputation of this blue chip would be damaged in one way or another.
In any case, it can be said that Intel’s shares are not the best option to invest capital in the short or medium term. There is likely to be a turnaround in which the market improves and earnings return to green territory. But at that point the competition would be one step ahead, which means that placing capital in Intel’s competitors seems more reasonable.
The content of this article is for informational purposes only and should not be assumed to be an invitation or advice to invest.
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