- Microprocessor giant misses second-quarter earnings forecasts and guides down for the third quarter
- Company launches cost reduction plan, reduces capital investment budget and axes its dividend
- Its woes question the value of $63 billion in share buybacks in the past decade alone
- Share price no higher now than in August 2013 even after buyback largesse
“While the fault does not lie exclusively with the silicon chip maker’s capital allocation policies, shareholders in Intel could be forgiven for wondering whether the firm could have put the $63 billion it has spent on share buybacks in the past decade to better use,” says AJ Bell investment director Russ Mould. “A net cash pile has become a net debt position, Intel has thus far failed to extend its dominance in personal computers to the mobile communications and artificial intelligence arenas, and the company has stopped both buybacks and dividend payments. Worst of all, the share price is no higher than it was a decade ago.
Source: LSEG Refinitiv data
“This suggests that the money spent on financial engineering, and trying to goose earnings per share figures, especially during the tenures of Brian Krzanich as chief executive in 2013 to 2018 and his successor Bob Swan in 2018 to 2021 may have been better deployed on product engineering instead.
Source: Company accounts
“Current boss Pat Gelsinger quickly cut out the buybacks, which was no surprise given his product background at the company as its chief technical officer under no less a leader than Andy Grove from 2001 to 2009 and the lack of progress in the company’s sales and profits. They in turn reflected the mature nature of the personal computing market, where Intel had reigned supreme, and its inability to replicate this dominance in mobile telecoms and now artificial intelligence. The company seems to be coming off worst in a market share fight with AMD and Nvidia, and Mr Gelsinger’s investment splurge to catch up is yet to bring the hoped-for benefits.
“Sales have weakened in each of the last two years and profits have plunged, always a danger in a highly operationally geared business such as this one. Intel needs to run its use chip fabrication facilities, or fabs, at full tilt, given the huge expenses and fixed costs associated with running them. The company currently has property plant and equipment valued at $103 billion in its balance sheet, well in excess of the analysts’ consensus forecasts for $55 billion in sales in 2024.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts
“No wonder earnings have collapsed given such numbers and Mr Gelsinger and team are having to respond with cuts to operating costs and capital expenditure.
Source: Company accounts
“Intel’s room for manoeuvre is further limited by how it now carries a net debt position. Its net cash pile peaked at around $16 billion in 2004 but that has been whittled away and then replaced by net borrowings, thanks to the pressure on profits, the need to invest heavily in cutting-edge production equipment and also those buybacks (not forgetting dividend payments that peaked at $6 billion annually in 2022).
Source: Company accounts
“If Intel still had those $63 billion the picture might look different and its ability to keep on investing to defend its competitive position would surely be enhanced, but the damage is done and Mr Gelsinger is having to budget accordingly.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, mid-point of management guidance for capex budgets for 2024E and 2025E
“If a company can afford to run a buyback from excess cash once it has met all of its bills, invested fully in the defence and development of its competitive position within its target market and left itself a buffer of cash on its balance sheet just in case something unexpected happens, then it must be doing something right – especially if it can do this consistently. In this case, buybacks are not the enemy of long-term investment. Buybacks may even prevent management from doing something silly like (over)paying for a big acquisition and – providing the share price is not trading in excess of intrinsic value – buybacks could create shareholder value.
“But if a company is skimping on investment in its core business, and spending cash on financial engineering (buybacks to flatter earnings per share figures) and not product engineering or development then there will surely be a reckoning at some stage – and Intel now is suffering that reckoning (just as General Electric did before it).
“As such, this is a not a case of buybacks being ‘good’ or ‘bad,’ but a timely warning that each buyback programme must be assessed on its merits, relative to the company’s operational performance, financial strength and ultimately its competitive position.”
