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Inside Intel’s Capital Allocation Strategy

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Mar. 15 2018, Updated 6:30 a.m. ET

Capital allocation

Intel (INTC) expects to earn strong cash flows in 2018. Below, we’ll assess how the company plans to use these cash flows constructively.

Intel stated its capital allocation priorities in 2017. First, it aims to invest in the organic growth of the business. Next, in terms of priority, it wants to expand through acquisitions, and third on the list is its goal of returning capital to its shareholders. Intel achieved this in 2017 and expects to maintain this in 2018 as well.

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Capital expenditure

Intel expects to spend $14 billion in capital expenditure in 2018, of which around $2 billion would come from prepayments by the customer under the memory supply agreement. This means Intel’s capital spending would be flat in 2018.

Of this $14 billion capital spending, Intel would spend $2.5 billion on memory—the same as in 2017. In January 2018, Intel ended its memory partnership with Micron (MU), which would come into effect in 2019, after it completes the production ramp of its third-generation 3D NAND (negative AND). This shouldn’t impact Intel’s memory capital sending in 2018.

However, Intel plans to increase its spending on logic by $1 billion in 2018 as it continues to invest in the 14 nm (nanometer) node, scales up the 10 nm node, and invests in the next-generation 7 nm node. The company would likely realize the benefits of these investments in 2019 in the form of unit cost reduction.

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Intel invests in Israel

There are media reports that Intel could invest in its Kiryat Gat plant in Israel. According to a Reuters report, Israeli Economy Minister Eli Cohen stated that the country’s largest tech employer, Intel, plans to invest $5 billion on upgrading the plant from the 10 nm to the 7nm node and complete the same by 2020.

Intel hasn’t yet commented on this news, and the news should be taken with a grain of salt, because Intel recently completed the facility’s upgrade to the 10 nm node from the 22 nm node. The company generally upgrades its facilities every three to five years, and recent US tax reforms are expected to encourage companies to invest in the US. All these points indicate that Intel is unlikely to invest in an upgrade in Israel anytime soon.

If the report is true, there’s still a possibility that Intel could invest in manufacturing automotive chips in Israel, now that it has acquired Israel-based Mobileye.

Shareholder returns

In 2017, Intel generated $10.3 billion in FCF (free cash flow), of which it returned $8.7 billion to shareholders, spending $5.1 billion on dividends and $3.6 billion on stock buybacks.

Continue to the next and final part of this series to see where else Intel is allocating its cash.

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