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Research analyst, valuentum
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Chipmaker Intel (INTC) has seen its share price take a large haircut this year, as investors worry about the decline of the PC, as well as Intel's lack of presence in the mobile ecosystem. Still, the company sits on a $10.4 billion of cash ($3 billion net cash) hoard, continues to make strides in mobile (though it's not there yet), and it has continued to do well in the enterprise market. Plus, its underpricing is remarkable (please click here for more info on that).

So why did the company just announce that it will raise $6 billion of debt? The first obvious reason is to capitalize on low interest rates. The 5 year notes of the offering will yield a paltry 1.35% ($3b), the 10 year notes will yield 2.7% ($1.5b), the 20 year notes will yield 4% ($750m), and the 30 year notes will yield 4.25% ($750m). This new $6 billion capital isn't coming at much of a cost, though it certainly increases the company's risk profile. Still, the new infusion of cash will be used to repurchase shares and continue heavy research and development investments.

Though the firm's free cash flow will decline (interest expense is an operating cash flow item under GAAP), total cash expenditures from financing activities (dividends) could decline more than the decline in operating cash flow (interest expense). Given that the spread of the firm's dividend yield (~4.5% annually) over the cost of the newly-issued debt is between 25 and 315 basis points (1.35% to 4.25%), the company will be making real cash savings by retiring stock and replacing it with debt.

Further, the deal looks like a homerun because shares of Intel appear considerably undervalued, in our view. Repurchasing stock when the shares are undervalued should yield a favorable return to shareholders (it is a value-creating proposition). And, technically speaking, the buyback could put a "floor" on the stock price because the firm would likely make large purchases upon any price declines (absorbing supply).

Ultimately, we like the debt offering, even though it adds considerable financial leverage to the firm's business. Oddly, it could increase the firm's Valuentum Dividend Cushion score because, as we previously mentioned, total cash outlays as it relates to dividend payment obligations will decline due to the reduced number of shares. We like the firm's current valuation, and we think rumors of its demise are greatly exaggerated. We continue to hold the firm in the portfolio of our Best Ideas Newsletter.

Source: We're Still Fans Of Intel, Nearly 5% Dividend Yield

Additional disclosure: INTC is included in our actively-managed portfolios.