On Tuesday, chip giant Intel (NASDAQ:INTC) announced the largest bond sale in the company's history. Intel is borrowing $6 billion, which will primarily be used to fund the company's stock buyback. This is an aggressive move by Intel, and a clear sign that the company believes its stock is undervalued. This is certainly an interesting move for the company, and I have differing opinions of whether or not this is good news.
This is the largest corporate bond sale since early November when Abbott Laboratories (NYSE:ABT) raised nearly $15 billion. This deal also eclipses Intel's $5 billion raise in September of 2011.
Intel has raised $6 billion, with the breakdown as follows.
- $3 Billion of 5-year notes at 1.35%.
- $1.5 Billion of 10-year notes at 2.70%.
- $750 Million of 20-year notes at 4.00%.
- $750 Million of 30-year notes at 4.25%.
The bonds were rated A1 by Moody's and A+ by Standard and Poor's. The total pre-tax interest cost based on the stated rates is roughly $143 million per year, which is an average interest rate of 2.38%.
Impact on balance sheet:
The following table is one I used when discussing Intel's third quarter results. The following are key balance sheet numbers over time, with the dollar values in millions. The cash and investments number includes both short and long-term investments.
*Liabilities to assets ratio.
This new debt offering almost doubles Intel's amount of debt. Now, let's assume that Intel's balance sheet has not changed since the end of Q3, for argument's sake. For this argument, assume that the following categories on the balance sheet have risen by $6 billion: cash, current assets, total assets, long-term debt, total liabilities. Also assume no fees, again for argument's sake. The before and after on the balance sheet is found below.
On the face of it, things look mixed. The cash pile, current ratio, and working capital all seem to improve because of $6 billion in additional cash. Since current liabilities are not affected, those ratios all look better, but as the company starts spending the cash, they'll start declining again. The debt goes into the long-term liabilities section, which is why the debt ratio jumps. It will only rise further as they spend the money on the stock buyback.
Impact on the income statement:
There are a couple of impacts a buyback has on the income statement. The first one is the one that bulls will point to. By Intel buying back its shares and reducing the outstanding share count, earnings per share will improve if net income remains constant. But earnings per share can be manipulated in a sense, thanks to buybacks and options dilution.
The other impact is increased interest expenses. I detailed above that the yearly impact is about $143 million, or roughly $36 million per quarter. If you go back to Intel's Q3, the company had operating income of $3.841 billion. So the interest cost would have been about 1% of that quarter's operating income, or about 0.27% of that quarter's $13 billion plus in revenues. It doesn't seem like much, but it will impact margins a little bit. Declining margins are something to worry about in regards to Intel.
Cash flow and the dividend:
I've argued in Intel articles over a number of months that declining net income for Intel would have a negative impact on the buyback. Because net income is the first line in the cash flow statement, a reduction in net income means cash flow from operations would be less than in previous periods, holding all other items constant.
Thus, falling net income produces less cash flow, and a company needs cash to pay a dividend and buy back stock. I've always mentioned that I don't think the dividend would be cut, because that is a clear negative sign to investors. But I've stated that I thought the amount of shares bought back could slow down going forward if cash flow is reduced. This debt raise will alleviate that concern for the time being, and buybacks should continue at their recent rates.
Conclusion - Is Intel now a buy?
I've been calling Intel a short for some time as sputtering revenue growth and falling net income has dampened my long term view of the name. I also felt that reduced cash flow would impact the buyback, which would then have a negative impact on earnings per share. However, today's news has calmed some of my fears. Now that we have a clear sign that the buyback won't be hurt as much as feared, Intel is becoming a buy again. With the company raising money specifically to buy back shares, I believe they are telling us that shares are undervalued. I've been negative on Intel for months, and rightly so, and was down on the name just two days ago. But this news is quite positive for the chip giant, and positive news for Intel has been hard to come by in recent months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.