Intel and the New Arbitrage: Sell Debt, Buy Stockby
If you’re a corporate treasurer, you’re loving life in 2012. Thanks to a roaring bull market for any yield, you’re selling your bonds at ever-cheaper rates—even borderline-sadistic terms. Expect your CEO to ship you all sorts of goodness from Hickory Farms. Borrowing for as little as possible satisfies a big part of your job description, which ideally should jibe with the other M.O. of keeping your shareholders happy, i.e., not jealous or smarting from abandonment issues.
So in this lopsided environment for capital, why not tap your borrowing prowess to sate that other constituency? You’re seeing more of this of late, what with Goldman Sachs upgrading Dell (down 30 percent this year; the S&P 500 is up 12 percent) on the possibility of a leveraged recapitalization or buyout. Last month, Sirius XM’s CEO remarked: “We will be very underleveraged in 2013, that the most likely scenario for us is to return capital to our shareholders.” Costco, HCA Holdings, and Booz Allen are arbitraging easy debt to boost their shares. On Tuesday, Intel announced its desire to get in on that, issuing $6 billion of debentures with an average coupon of 2.38 percent to help fund the buyback of its stock, which is down 18 percent this year and trades at the lowest earnings multiple in the 30-member Philadelphia Semiconductor Index. Compare 2.38 percent with Intel’s dividend yield of 4.5 percent and you can taste a bit of the motivation.
In Finance 101, you’re taught that equity is your dearest form of financing. It’s your seed corn. Your employee motivation. Your acquisition currency. Squander it at everyone’s peril. Apple shares were a tad over $3 in 1997; today, they’re at $538.79. (Albeit down 6 percent on Wednesday.) Would that be the case if the late Steve Jobs hadn’t been so stingy with his stock?
On the flip side of the ledger, the bond market has practically been begging for more issuance. Yields on investment-grade corporate debt fell to a record-low 2.73 percent on Nov. 8, according to Bank of America Merrill Lynch index data. According to Moody’s Investor Service, corporations (public and private) have debt-financed more than $5.5 billion in dividends in the third quarter, on top of more than $11 billion in the first half of the year. As things get more cliffy, companies have been racing to pay out special dividends.
“You have big, mature companies like Intel, Microsoft, and Cisco with non-optimal capital structures that are having an extremely negative effect on their share performance,” says Ivan Feinseth of Tigress Financial Partners. “They are sitting on way too much cash. You will start to see shareholders call out managements on this, especially since banks want to loan to those that don’t need it. So get it while you can.”
Intel’s move to lever up has not put a dent in its creditworthiness, as tracked by Moody’s, Fitch, and Standard & Poor’s. Moody’s estimates that the chipmaker will generate about $4 billion of free cash flow next year after about $10 billion in capital and just under $5 billion in common dividend payments. Intel is also husbanding $10.5 billion of cash and short-term investments plus $3.9 billion of long-term marketable securities. Its equity market capitalization: $99 billion.
Thing is, Intel management has already spent $90 billion on share buybacks and dividends over the past decade, one that has seen major disruption in its core markets. To what end is unclear. After all, the shares would likely have done far worse without that internal support.
Writ larger, leveraged recapitalizations and shareholder refunds could well represent the latest (un)intended spillover from the Federal Reserve’s now four-year campaign of zero-interest-rate policy. Stock price inflation could stoke more economically efficacious activity, like investing in payrolls and plants.
Or it could be far more basic than that. “Shareholders and the stock market,” says Feinseth, “will not pay managers to sit on cash. If they can’t use it, they must give it to those who can.”