It is becoming harder and harder to find inexpensive, high quality, dividend growth stocks. However, one stock that has yet to greatly increase in price this year is Intel (INTC). Intel currently has about a 10 P/E, large amounts of free cash flow, and a 4.3% dividend yield. Intel has also provided its shareholders with ample dividend growth, increasing the dividend 60% since 2009. Even more impressive has been the amount of stock Intel has repurchased, with 191M shares repurchased in 2012.
Over the past five years, Intel has increased its TTM EPS by over 85% and its TTM revenue per share by over 55%. Yet, Intel's share price has barely moved, up less than 1%. In sharp contrast, the S&P is up over 17% during this time frame.
I am a firm believer in stock buybacks, especially in the case when the stock in question is trading at a discount to its typical valuation. It is my opinion that Intel is currently undervalued, and that the company should be doing everything it can to buy back stock. Be that using cash on the balance sheet, or even issuing debt.
However, there are some that believe that Intel is being too aggressive with its share buyback and dividend policy. They point out that Intel's net cash balance has already fallen below $5B and that Intel may need to issue debt to continue the buybacks, especially since 2013 capex is expected to surge.
To put it mildly, I disagree with the notion that Intel is being too aggressive with its buybacks and dividends. I actually think that Intel should be much more aggressive, especially with its stock buybacks. While in the past Intel may have bought back stock at sky high multiples, this is now not the case. The stock is trading at a 10 P/E, yields 4% and interest rates are at or near historic lows. If there was ever an ideal moment for Intel to lever its balance sheet to buy back stock, it would be now.
How would buying back stock affect Intel's per share metrics? To answer this we need to look at Intel's full-year 2013 guidance. I have previously written about this guidance, and have already estimated some of Intel's full year metrics. Please note that I will be using only the midpoint numbers:
From the list above, I will be using the revenue, net income, and free cash flow figures. Also note that I will be using Intel's weighted average diluted common shares outstanding figure of 5.095B, total cash of $18.16B and total long-term debt of $13.14B as of Q4 2012.
Now using these numbers, let us take a look at what one share of Intel currently represents, note that these numbers are all per share except for the shares outstanding:
Intel at current prices with no share buybacks
Free Cash Flow
Total Long-Term Debt
Now, let us assume several buyback scenarios:
- For the first scenario, we will assume that Intel issues no new debt and repurchases about 234.4M shares for $5B from its cash total
- For the second scenario, we will assume that Intel issues $5B of debt and spends $5B from its cash total to repurchase about 468.8M shares
- For the third scenario, we will assume that Intel issues $15B of debt and spends $5B from its cash total to repurchase about 937.6M shares
For all the scenarios, let us also assume that the current dividend of about 4% is equal to the interest paid on any new debt:
|All figures are per share||No Buybacks||$5B||$10B||$20B|
Free Cash Flow
Total Long-Term Debt
Notice a pattern? The more shares Intel repurchases, the higher its free cash flow, revenue, and net income per share become. Even by increasing its debt load by $15B and spending $5B in cash, Intel would still have only $6.77 per share in debt. I really think that buying back shares at current prices is a no-brainer, and that Intel should definitely NOT stop being aggressive with its share repurchases.
To those that do not like this sort of financial engineering, I ask: What good does a large cash stockpile serve if it is not deployed to benefit shareholders? Some companies tend to spending their cash unwisely, just ask HP (HPQ) shareholders about Autonomy. I would rather Intel give back its cash via dividends and share repurchases than to see them do a wasteful acquisition.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.