These Stocks Could Be Next After Intel's Dividend Cut

The dividend of Intel INTC -2.46% has been cut by the company. More companies could do the same in these difficult times for the economy and profits if they were in a less treacherous environment.

‍

The stock of Intel (ticker: INTC) fell about 16% in the past month as a result of the company cutting its dividend by 66% to an annual 50 cents per share. In recent years, Intel has lost market share for chips to Advanced Micro Devices (AMD) and has found it difficult to meet Wall Street's earnings expectations. PC sales are declining year over year, weighing on earnings. The company's own problems may have contributed to a dividend cut this large, but also the economic environment.

‍

While some companies are facing macroeconomic challenges as well, more dividend cuts may be forthcoming as a result of these challenges. Compared to the same period one year ago, analysts' estimates for earnings per share for S&P 500SPX –1.45%  companies have already dropped by about 10.5% in the past year, according to FactSet.

‍

A Chip Maker Gets Real

In order to find potential cuts in dividends, we screened the 115 S&P 500 companies with expected dividend payout ratios of more than 50% by 2023, which is the percentage of earnings that will be distributed as dividends to shareholders. Currently, the index payout ratio is 31.5%, which means that if earnings projections fall, it is more likely that dividend payments will also fall if earnings projections fall. If earnings projections fall, the payout ratio on the index is 31.5%. It is a common practice for companies to conserve cash on their balance sheets so that they can reinvest in new projects. The focus of our research was on companies that might experience some adverse impact on their earnings if the economy continues to weaken.

‍

Despite lower consumer spending, Home Depot HD -0.68% (HD), McDonald's MCD -1.25% (MCD), and Darden Restaurants (DRI) have payout ratios of 52%, 58%, and 62%, respectively. SCCO (Southern Copper) has a 79% payout ratio, and profits could drop if economic demand and copper prices decline. Among diversified materials makers, Dow Inc. (DOW) has an 88% payout ratio.

‍

Even so, the companies may be able to maintain their current dividends if a recession is only mild in nature. It is possible that even if earnings projections drop, they could rely on balance sheet cash to continue to pay dividends while they wait for an eventual recovery, especially if the Fed ceases to raise interest rates in the near future. There was no immediate response from any of the companies to a request for comment.

‍

“Divided cuts are much more likely in a hard-landing scenario,” said Ed Yardeni, president of Yardeni Research. This scenario would see the Fed lift rates to reduce inflation, sending the economy into a deep recession.

‍

There is still a possibility that lesser-quality companies with high dividend payout ratios, especially those with heavy debt loads, could still find themselves having to lower dividend payments even in the absence of a hard landing.

‍

There are a number of companies that make brands such as Northface and Timberland, but VF Corp. (VFC) is a good example of this. With an 86% payout ratio but just under $5 billion of net debt, it is about 3.3 times the analysts' expectations of the company's earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2023 of $1.4 billion. It is estimated that the aggregate net debt to EBITDA ratio of the S&P 500 is 1.2 times. There is a possibility that VF will be forced to give priority to its lenders over shareholders if its profit forecast drops.

‍

Despite the fact that Kohl's (KSS) isn't a member of the S&P 500, it is in the same boat. Having a payout ratio of 66%, the $3.3 billion department store has a payout ratio of $3.3 billion. With a net debt of $4.13 billion, which is about 2.6 times the expected Ebitda in 2023, the company may also have to prioritize its lenders in terms of its liquidity needs. Both VF and Kohl's declined to comment on the matter.

‍

“To maintain their good standing, [retail-related firms] may cut back on dividends to show they're paying attention to creditors," Yardeni said.

‍

Stock investors hope these stocks won't suffer the same fate as Intel.

‍