An Intel Payout? Watch Out


By Olga Kharif Having a lot of cash on hand used to be considered a good thing. But now that software giant Microsoft (MSFT) has promised its shareholders a mammoth $32 billion one-time cash dividend (part of a four-year $75 billion payout), independent directors of chipmaker Intel (INTC) are demanding one, too. The stock's price has remained flat, at around $23, since the news of the divident discussion became known. Intel, however, may not want to jump on the bandwagon so quickly.

The board is still mulling its decision, but it could decide to authorize a one-time cash payout of about $4 billion, figures Tai Nguyen, an analyst with Susquehanna Financial Group in San Francisco. Intel already doubled its regular dividend from 2 cents to 4 cents at the beginning of 2004. A $4 billion one-time dividend on top of that would bring its cash and short-term investments to below $10 billion, Nguyen estimates.

The idea presents an interesting dilemma for Intel investors. In a market that has seen uneven growth for tech stocks, getting a one-time bonus like that would be sweet in the short term. But similar to the long-term challenges Microsoft faces, some analysts say the potential payout suggests that Intel, too, might be looking at itself as a company whose growth will soon slow vs. one that will diversify into an even larger, faster-growing chipmaker.

DISASTROUS VENTURES. Intel has been doing what it can to sustain strong revenue growth the past few years even as the PC market expanded by just 5% to 7% annually. This year it caught a break as corporations started making up for their slack PC purchases during the downturn. That has helped Intel keep its revenues growing at high double-digit rates recently.

However, to keep up that kind of growth, Intel knows it needs to diversify. Already, its investing arm, Intel Capital, has pumped billions into wireless and digital-home initiatives, hoping to provide processors for everything from MP3 players to TVs.

Yet Intel's headway into many of these emerging areas, such as cell-phone processors, has been slow. Several years ago, it exited several disastrous ventures, like Web hosting. The net result: Intel still receives nearly 80% of its revenues from PC processors.

DOWNTURN DIFFICULTIES. So, one way of looking at Intel's consideration of a cash payout to shareholders is as an acknowledgement that expanding into new lines of business isn't in the cards -- at least, not any time soon. Some shareholders are just fine with that approach. "I'd rather have the payoff than have Intel venture into areas where they don't have a demonstrated competency," says Peter Hofstra, senior analyst with AIC funds, which hold Intel shares.

Still, the one-time payout approach has its risks. For starters, the semiconductor business is far more capital-intensive than is the software industry. Intel typically spends around $4 billion a year on improving production. It expects to invest $4.8 billion in 2004 on research and development, and that spending rises every year, says Brian Matas, an analyst with chip consultancy IC Insights in Scottsdale, Ariz.

That kind of spending is no problem in good times, but it can get tough during a down cycle. And one is expected in 2005 or 2006, analysts say. Intel has usually been able to generate cash even during downturns. Back in 2000, it increased cash and short-term investments by $2 billion. But the next year, they declined by $3.1 billion. Even though Intel still had $10.3 billion on hand, it had to reduce staff and get rid of money-losing divisions.

"ONE MORE BRICK." If Intel is holding less cash when orders aren't growing as fast, a one-time dividend could "be one more brick in their knapsack," says Tom Smith, an analyst with rating service Standard & Poor's in New York. "You want to impress investors during the downturn that you are a fortress, you will survive." With fewer greenbacks, that might be tougher to do.

Intel says the dividend decision hasn't been made. "We don't have any changes to announce at this time," writes an Intel spokesperson in an e-mail. But investors who are clamoring for it to dole out the cash should think twice about the long-term impact of such a short-term treat. Kharif is a reporter for BusinessWeek Online in Portland, Ore.


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