Intel Is Smarter Than a Fifth-Grader
As a general rule, debt is bad. You don't want to take it on. And you don't want to be in it ... unless you're Intel (NAS: INTC) .
Yesterday, the biggest name "inside" personal computers announced that it was issuing $5 billion worth of senior unsecured notes (that's "debt" to you and me). That sounded kind of strange, of course, coming from a company that already had more than $11.6 billion in cash on its balance sheet, against only $2.1 billion in debt. But listen carefully, and we'll reveal to you the method in Intel's madness.
For months, we've been observing a rush by Blue Chip America to cash in on record-low interest rates here in the middle of the Great Recession. Last year alone, IBM (NYS: IBM) and Microsoft (NAS: MSFT) made headlines when they scored sub-1% rates on multibillion-dollar bond issuances. Later it was Johnson & Johnson (NYS: JNJ) snapping up sub-3% rates on relatively long-dated 10-year paper. None of these companies, obviously, is hurting for cash -- but clearly, the lure of cheap money is difficult to resist.
Four pennies borrowed is a penny earned. (It's not grammatical, but it's true.)
Indeed, in Intel's case, it may be especially hard. Yesterday, Nomura Securities put forth the theory that if Intel is particularly astute in the use of its cash, it could actually wind up being paid to take on debt. As the analyst works the numbers, Intel is paying 3% or less interest on its new debt -- $0.03 on the dollar. But if the company should take the proceeds of the debt and use it to buy back stock, well, each share of Intel stock today carries with it the obligation to pay shareholders a 4% dividend -- $0.04 on the dollar.
Result: Every time Intel borrows a buck to buy back shares, it saves itself a net penny.
As a side benefit, if Intel should spend all $5 billion of its new debt on share buybacks, the company would reduce shares outstanding by 235 million -- concentrating its net profits among the remaining shares and adding as much as $0.09 to the company's annual per share earnings. It would also add about 4% to Intel's annual earnings growth rate in the process -- shocking the heck out of Intel-growth skeptics, I suspect.
Pretty clever, Intel. Kudos.
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At the time this article was published Fool contributorRich Smithowns no shares of any company named above. The Motley Fool owns shares of Johnson & Johnson, Microsoft, Intel, and IBM and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Intel, Johnson & Johnson, and Microsoft, creating diagonal call positions in Johnson & Johnson and Intel, and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.
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