Things were going well for memory-chip maker Micron (MU 7.92%) in 2021. Demand for PCs, servers, and all manner of gadgets was red hot, pushing up prices and sales volumes for memory chips. In Micron's fiscal 2021, which ended on Sept. 2 of that year, the company generated $27.7 billion of revenue, $5.9 billion of net income, and about $2.4 billion of free cash flow.
The situation was so good that Micron decided to initiate its first quarterly dividend since the late 1990s. The company declared a $0.10 per-share dividend in August 2021 and raised the dividend to $0.115 per share in mid-2022. The dividend was in addition to an active share-buyback program that has doled out $4.2 billion since fiscal 2020.
When Micron announced its first dividend in decades, management painted a picture of a transformed company. CEO Sanjay Mehrotra touted Micron's enhanced profitability and a rock-solid balance sheet, both of which were certainly the case in 2021. But 2022 has proven that the brutal cycles that have long plagued the memory-chip industry aren't going away.
NASDAQ: MU
Key Data Points
Everything falls apart
Shortages during the first two years of the pandemic have given way to gluts. PC sales are tumbling, and smartphone sales are weak, and both Micron and its customers have piled up far more inventory than end markets can reasonably consume.
Micron's sales have crashed, with revenue down 47% year over year in the most recent quarter. The company is slashing its capital expenditures (capex) plans, reducing wafer starts, slowing down process tech node transitions, and cutting operating costs.
There's a reason Micron hasn't paid a dividend since the 1990s: The name of the game in a cyclical, commodity industry like memory chips is to hoard cash during the good times so that you can survive the bad times. Micron hasn't suffered a truly bad downturn since the global financial crisis, but this downturn promises to be as bad or worse.
Micron has already turned unprofitable, with a net loss of $195 million and a free-cash-flow loss of $1.5 billion in the most recent quarter. The company's own inventory is out of control. Days inventory outstanding is at the highest level since the bursting of the dot-com bubble. The company's production cuts may help, but memory-chip prices aren't going to recover anytime soon.
This leaves Micron in a situation where it's likely to be burning cash for the foreseeable future. The company boosted its cash balance earlier this year by taking on additional debt and suspended its share repurchases for now. Combined with capex cuts and cost reductions, this will help reduce the amount of cash that's flying out the door.
A dividend cut is probably coming
While Micron hasn't indicated that the dividend is at risk, it's safe to say that anything and everything will be on the table. The dividend eats up a meaningful amount of cash, and it will be hard to justify if the downturn drags on through much of 2023.
Micron's $0.115 quarterly-dividend payment will cost the company about $500 million over the next year, based on its current share count. For perspective, Micron's cost-cutting initiatives aim to reduce operating expenses by roughly $600 million annually. Getting rid of the dividend is an easy way to preserve a meaningful amount of cash.
The longer this downturn lasts, the more likely a dividend cut or suspension becomes. Micron competitor Samsung is reportedly not considering production cuts, which will only make the oversupply situation worse. Micron can cut production all it wants, but it won't matter very much if the market leader isn't doing the same.
Unless something drastically changes the outlook for the memory-chip industry in 2023, a dividend cut from Micron looks like a foregone conclusion.
