The bad news keeps coming for the PC ecosystem and Intel Corp. (INTC), which has enjoyed its dominance in the arena for nearly 30 years.
PC sales fell from year-ago levels during the usually crucial Christmas season for the first time in half a decade. They were down 4.9% in the fourth quarter according to a report released by Gartner, Monday. That’s slightly narrower than the 6.4% decline estimated by IDC last week, but that’s small solace to Microsoft (MSFT), Intel and myriad hardware makers.
The decline came despite widespread availability of devices powered by Windows 8, Microsoft’s latest operating system. Normally, a new version of Windows spurs sales because users are excited by new features. But reviews of Windows 8 have been mixed, and many users report a steep learning curve in combining the new touch and gesture capabilities of the system with their traditional mouse and keyboard techniques.
Investors are increasingly looking to these companies for dividend yields rather than growth.
Intel’s 4.14% dividend yield seems particularly attractive. It is amply covered by $3.5 billion in cash and equivalents. The third quarter payout of $1.1 billion and $1.2 billion in buybacks was far below the $5.1 billion generated in cash from operations. Still, its current 52% payout ratio is high enough to raise questions about whether it will continue its 10-year history of annual dividend increases.
Intel raised its dividend in both May and July 2012, citing anticipated strong demand in its core businesses and growth from its new smartphone chips. That optimism now looks premature. Intel ended up scaling back its outlook, and progress in the market for mobile chips has been very limited.
Intel’s strategy has long been to take advantage of its dominance in the PC and server markets to fund capital spending and R&D programs that no competitors can match. It builds and operates its own chip fabs, unlike ARM Holdings (ARMH) and Qualcomm (QCOM), which dominate the cell phone chip market. Intel’s capital spending was scaled back to a still-immense $11.3 billion last year. And research and development spending is in the same range. Intel has long managed those huge spending commitments, but they limit its financial flexibility.
The big question for Intel investors is when revenues will resume growing. If server, and particularly PC sales increase this year, Intel will benefit. Corporate and government buyers are likely to start installing new PCs to run Windows 8, because their existing fleet of PCs is growing old. But the consumer outlook is cloudy. At Christmas, tablets were the gift that many consumers wanted – not Intel-powered notebooks. Intel’s energy-efficient Atom chips haven’t yet made much headway with tablet makers, so that shift in preference hurts.
Gartner analysts suggest the tablet shift among consumers may be expanding. They say it appears that multi-PC families are moving to a new model where they have one highly capable shared desktop, but each family member has a tablet of his own used for most web-surfing, video-watching and social media usage.
Corporate buyers are less likely to abandon laptops for tablets. Creating documents and spreadsheets remains a core responsibility of most employees. Tablet keypads can’t compare with full function keyboards for creating reports and presentations.
Intel will report fourth quarter earnings on Jan. 17 and give its outlook for upcoming quarters. The longer-term outlook remains worrisome. Intel hasn’t had much visible success in the fast growing smart-phone and tablet markets. Arm Holdings has begun selling its low-power designs for server chips that could work in data centers, threatening another core Intel market. And Paul Otellini, Intel’s CEO, announced in November that he would retire this spring, two years early. That looks like a pretty clear indication he isn’t expecting a quick turnaround.
Bill Bulkeley, a contributing editor at YCharts, worked for the Wall Street Journal for more than 30 years, covering high tech since the birth of the PC. He also wrote about the Internet and the imaging industry. He has written for Technology Review, Knowledge@Wharton and CIO Magazine. He can be reached at firstname.lastname@example.org.
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