The Intel Warning: Is the High Dividend in Jeopardy?

Market participants had a rude awakening this morning, as jitters over Euro-zone instability took a back seat to Intel’s rather outsized earnings warning. In fact, the ink had barely dried on my last piece about Intel and its bullish dividend prospects, before the company lowered the hammer today.

In their announcement, Intel warned that they would come up as much as $1 billion shy of their prior fourth quarter earnings estimate of $14.7 billion. Interestingly, the warning has nothing to do with a slackening worldwide demand for computer hardware. Instead, due to the unprecedented flooding in Thailand, damage to production facilities has created a global shortage of hard-disk drives.

The announcement sent a shiver down the spine of Intel’s stock price, with shares falling about 5 percent to $23.75 in early trading. That may not seem like a big drop, but up until today it had taken INTC ‘s share price an entire year to rise a total of 8 percent and change—so that’s rather big and rapid haircut.

Although Intel’s CFO Stacy Smith said that demand for servers and PCs “healthy and growing,” analysts project that the parts shortage may linger into the second half of next year. According to Raymond James analyst Hans Mosesmann, “The hard drive disk shortage problem is going to be a little more pervasive than people think…for the next six months, we’ll be in limbo.”

For dividend-oriented investors, the million-dollar question becomes how will this situation impact Intel’s dividend, if at all? Given that the company raised their dividend last month for the fourth time since the beginning of the recession in 2007, it seems unlikely that there will be an imminent drop in the dividend payout level. In fact, despite truly terrible market conditions, almost half of the companies in the S & P 500 have raised their dividends during the same period of time. It’s simply become a popular strategy for keeping investors happy.

That said, the news out of Intel certainly doesn’t bode well for additional dividend increases in the near future, and almost invariably will put ongoing selling pressure on the underlying share price—especially given the shaky nature of worldwide markets. Although still attractive from a yield perspective, ongoing downward pressure on the stock price will most likely put a short-term ceiling on INTC’s dividend growth potential heading into 2012.