Intel in Bond Gambit to Rescue Ailing Stock
Comment of the Day

December 11 2012

Commentary by Eoin Treacy

Intel in Bond Gambit to Rescue Ailing Stock

This article by Charles Mead and Ian King for Bloomberg may be of interest to subscribers. Here is a section:
Intel Corp. is taking advantage of bond interest rates below its dividend yield as the world's largest semiconductor maker borrows to buy back stock battered by its lagging share in the smartphone and tablet markets.

The firm issued $6 billion of debentures in a four-part sale yesterday with an average coupon of 2.38 percent that will help fund its stock buyback program. That's lower than Intel's indicated dividend yield of 4.5 percent on equity that trades at a lower price relative to earnings than every profitable firm in the 30-member Philadelphia Semiconductor Index.

Intel is enriching shareholders with borrowed money for the second time in 15 months after selling $5 billion of debt in September 2011. While its shares have underperformed as the Santa Clara, California-based firm and Microsoft Corp. Struggle to combat Apple Inc. in the $63.2 billion tablet market, bonds of the industry's biggest generator of cash trade at tighter relative yields than the average for technology companies.

“They're essentially doing an arbitrage by borrowing at cheaper rates and retiring higher-cost equity,” Alan Shepard, an analyst at Madison Investment Advisors Inc., which holds Intel debt and oversees about $16 billion in Madison, Wisconsin, said in an e-mail. “Given that Intel has relatively low leverage, this shouldn't affect its ratings.”

Eoin Treacy's view Intel has lost market share by not adapting fast enough to the brave new world of mobile devices but it remains a major player in the chip market. The share currently has a dividend yield of 4.48%, P/E of 8.62 and fell abruptly in November to test the 2011 lows near $20. This represents a potential area of support and a sustained move below $19.25 would be required to question potential for at least an additional unwind of the short-term oversold condition.

On a weighted average cost of capital basis, short and long-term debt makes up a negligible proportion of the company's liabilities so it has room to increase its debt load in order to buy back its shares. This is a trend which has been evident across the equity sector for much of the last year as low interest rates, demand for debt and ambivalence towards the equity market make balance sheet optimisation more attractive.

I performed a search of Bloomberg this morning for European and US shares whose dividend yield is greater than the average coupon they pay on their debt. Here is the list of 159 shares. These represent companies who may be tempted to use new debt to buy back their shares. Some of the more notable entries are:

Vodafone announced today that it had bought back 7.5m shares. It currently yields 6.7% and is testing the lower side of its almost two-year range near 160p. A sustained move below that level would be required to question current scope for an additional bounce. A number of other European telecoms appear on this list.

Nestle is an S&P Europe 350 dividend aristocrat and currently yields 3.19%. While the company has an impressive record of returning money to shareholders, there is an argument for reducing the supply of stock. The share found support in the region of the 200-day MA four weeks ago and a sustained move below it would be required to begin to question medium-term upside potential.

Costco remains one of the better performing shares in the USA and paid a special cash dividend of $7 in November. It normally yields closer to 1.1%. A sustained move below the 200-day MA would be required to question the consistency of the medium-term uptrend.

Following a steep decline following the US Presidential election Southern Corp's yield has risen to 4.46% and the attractiveness of buying back its shares has increased. The share found support in the region of $41.80 three weeks ago and a sustained move below that area would be required to check potential for an additional bounce.

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