On Jan. 23, Intel (NASDAQ: INTC) declared its most recent dividend and, perhaps surprisingly to many, the company didn't increase its dividend year-over-year -- something that income investors likely didn't appreciate. In a previous column, I went over several potential reasons why the company may have opted not to boost its dividend.
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A wafer of Intel seventh-generation Core chips. Image source: Intel.
Now that the company has announced its full-year earnings results for 2016 and, more importantly, issued its financial guidance for 2017, it's quite clear why the chip-maker held off on giving its shareholders raises.
A big jump in capital expenditures
Companies fund their capital return programs, including share repurchases and dividends, primarily from the free cash flow that they generate. As a company grows its free cash flow and becomes increasingly confident in future free cash flow growth, it increases its ability to return cash to shareholders.
In 2016, Intel reported earnings per share on a non-Generally Accepted Accounting Principles, or non-GAAP basis of $2.72. For 2017, it is guiding to non-GAAP earnings per share of $2.80 -- up around 3% year-over-year.
So, if Intel's earnings are expected to grow, why didn't it boost its dividend?
Simple: Intel's guidance includes capital expenditure guidance of $12 billion -- up from the $9.6 billion that it spent on capital expenditures in 2016.
This means that even if Intel makes a slightly bigger net income in 2017 than it did in 2016, it's not going to generate as much free cash flow(for a good read on how to square net income with free cash flow, read this excellent write-up).
While Intel should still have room to boost its dividend even if it's planning for a year-over-year decline in free cash flow, companies often do not want to commit too much of their planned free cash flow generation to the dividend so that they have financial flexibility for other moves (like paying off debt, making significant acquisitions, and so on).
Why the greater capital expenditures?
Intel indicated that of the $12 billion that it intends to spend on capital expenditures in 2017, about $2.5 billion of it will go to support its ambitions in non-volatile memory production (think 3D NAND and 3D XPoint memory technologies). The remaining capital expenditures at roughly $9.5 billion will presumably go toward supporting the company's logic manufacturing business.
Since Intel's capital expenditures during 2016 were $9.6 billion, with approximately $1.5 billion of that spending going toward memory, it's clear that the chip-maker is planning sizable capital spending increases in 2017 targeted at both its relatively new memory efforts as well as in its core logic manufacturing business.
This shouldn't come as too much of a surprise to investors. After all, Intel has been talking at great length about its ambitions in non-volatile memory (citing it as a key long-term growth driver), so the company is putting its money where its mouth is.
Additionally, the company says that it's planning to start shipping the first products based on its 10-nanometer manufacturing technology at the end of 2017, with a continued ramp up in 2018. Intel is going to need to spend money this year to support the 10-nanometer capacity that it plans to have in place to support production over the next several years, so it's little wonder that the company's logic-oriented capital expenditures are going to be running hot in 2017.
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