Could someone explain to a market novice what the rationale would be for this? I thought buybacks were a way of delivering value back to existing shareholders, but why take on debt to do that?
Current share price is about $20. So for the $6 billion you retire 300 million shares. There are about 5 billion total shares outstanding so you retire 6% of your shares.
Effective interest rate on the $6 billion in bonds is approx. 2.4%. The stocks dividend is 0.90 cents per share which equals a dividend yield of 4.6% .
Think of it as a small company where you own 94% of the company and a partner who has a 6% share of your company. You can take out a loan for $100k and pay 2.4% ($2,400 per year) to the bank. or keep paying him a dividend (his share of earnings) at $4,600 per year. Kind of a no-brainer in terms of immediate cash flow. Plus after 10 years when you've paid off the loan you now own 100% of your company.
When you think of it that way it's really a slam dunk for Intel.
For Intel, their cash flow for 2011 was approx. $20 billion so they can obviously afford to pay back the loan.
For Intel, debt is currently a less expensive way of capitalizing the company than equity. At 1-4% interest, Intel can borrow money through debt at a very cheap rate, but it is expensive for them to raise money through equity sales since their stock price is relatively low. Swapping debt for equity allows them to borrow money from the cheaper source without having to deplete their cash reserves.
Take it from the point of view of Earnings Per Share (EPS).
The company thinks that reducing the number of shares can be accomplished at a price that is low, and that the interest on the loan to reduce the shares won't lower EPS. The shareholders should be (nominally) happy, because they are getting an earning income stream that is going to be higher in the future.
Now as an aside: Corporations famously mistime buying back shares, and management is usually trying to feather their nest rather than deliver long term value, so they typically make poor decisions on buybacks.
Swapping debt for equity allows Intel to benefit from the interest tax shields from debt, which raises the enterprise value of the firm, assuming that default risk does not disproportionately rise.
Buybacks usually mean the company thinks their stock is underpriced. However, x86 is currently being disrupted by ARM, and the prognosis does not look good. For example, they've finally got their power consumption to around ARM levels, but the entire mobile industry is based on ARM - ARM is now the incumbent.
Is this Intel hubris, or do they know something we don't?
Buybacks usually mean the company thinks their stock is underpriced.
Everyone gets this wrong.
I blame crappy financial journalism for the widespread belief that stock buybacks are supposed to increase the price of the company.
According to financial theory, a stock buyback destroys cash on hand and outstanding stock at the same time. This reduces the value of a company by EXACTLY AS MUCH as it reduces the outstanding stock. Therefore the stock price should remain unchanged to first order effects.
Therefore a stock buyback in theory is just a way of returning money to investors with different tax consequences than a dividend.
So all that you should read from "stock buyback" is, "excess cash is available to distribute to the owners".
In this case excess cash is being raised by taking on debt. But the Modigliani–Miller theorem also says that the structure of financing of a company has no correlation with its performance, so that shift should not matter much.
It's honestly not clear that the underlying CPU architecture really matters anymore. Smaller customers might care about the technical hassles involved with switching to a new architecture, but smaller customers don't count. The larger customers care much more about per-unit cost savings, and not at all about NRE costs.
In any case there isn't a lot of ARM assembly out there these days, and everything else can retarget x86 with little more than a recompile.
There seems to be a lot of confusion about why they would do this, the text books say it indicates that the company thinks its stock is undervalued and that the management have the best information on the company so they would know.
In this case I think it is a cost of capital vs interest rate decision.
tl:dr Interest rates are low
npguy|13 years ago
paragraft|13 years ago
gromi60|13 years ago
Effective interest rate on the $6 billion in bonds is approx. 2.4%. The stocks dividend is 0.90 cents per share which equals a dividend yield of 4.6% .
Think of it as a small company where you own 94% of the company and a partner who has a 6% share of your company. You can take out a loan for $100k and pay 2.4% ($2,400 per year) to the bank. or keep paying him a dividend (his share of earnings) at $4,600 per year. Kind of a no-brainer in terms of immediate cash flow. Plus after 10 years when you've paid off the loan you now own 100% of your company.
When you think of it that way it's really a slam dunk for Intel.
For Intel, their cash flow for 2011 was approx. $20 billion so they can obviously afford to pay back the loan.
gregw134|13 years ago
marcamillion|13 years ago
Plus, there are other tax advantages to taking on debt.
jpdoctor|13 years ago
The company thinks that reducing the number of shares can be accomplished at a price that is low, and that the interest on the loan to reduce the shares won't lower EPS. The shareholders should be (nominally) happy, because they are getting an earning income stream that is going to be higher in the future.
Now as an aside: Corporations famously mistime buying back shares, and management is usually trying to feather their nest rather than deliver long term value, so they typically make poor decisions on buybacks.
meltzerj|13 years ago
unknown|13 years ago
[deleted]
pebb|13 years ago
6ren|13 years ago
Is this Intel hubris, or do they know something we don't?
btilly|13 years ago
Everyone gets this wrong.
I blame crappy financial journalism for the widespread belief that stock buybacks are supposed to increase the price of the company.
According to financial theory, a stock buyback destroys cash on hand and outstanding stock at the same time. This reduces the value of a company by EXACTLY AS MUCH as it reduces the outstanding stock. Therefore the stock price should remain unchanged to first order effects.
Therefore a stock buyback in theory is just a way of returning money to investors with different tax consequences than a dividend.
So all that you should read from "stock buyback" is, "excess cash is available to distribute to the owners".
In this case excess cash is being raised by taking on debt. But the Modigliani–Miller theorem also says that the structure of financing of a company has no correlation with its performance, so that shift should not matter much.
CamperBob2|13 years ago
In any case there isn't a lot of ARM assembly out there these days, and everything else can retarget x86 with little more than a recompile.
entrode|13 years ago
raverbashing|13 years ago
unknown|13 years ago
[deleted]
defactoserfdom|13 years ago