Is Intel Smarter Than A 5th Grader?
This is important to understand. Read the article below and learn why Intel borrowed $5 billion in debt when they have $11 billion in cash.
“Americans devote the largest portion of their incomes to housing. Consequently, how you handle the purchase (financing) of your home will have far‐reaching implications on virtually every facet of your financial life, including your ability to save, pay for college, and plan for your retirement.” – Ric Edelman
Renters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters. KCMBlog.com
Intel Is Smarter Than a Fifth-Grader
As a general rule, debt is bad. You don’t want to take it on. And you don’t want to be in it … unless you’re Intel (NAS: INTC) .
Yesterday, the biggest name “inside” personal computers announced that it was issuing $5 billion worth of senior unsecured notes (that’s “debt” to you and me). That sounded kind of strange, of course, coming from a company that already had more than $11.6 billion in cash on its balance sheet, against only $2.1 billion in debt. But listen carefully, and we’ll reveal to you the method in Intel’s madness.
For months, we’ve been observing a rush by Blue Chip America to cash in on record-low interest rates here in the middle of the Great Recession. Last year alone, IBM (NYS: IBM) and Microsoft (NAS: MSFT) made headlines when they scored sub-1% rates on multibillion-dollar bond issuances. Later it was Johnson & Johnson (NYS: JNJ) snapping up sub-3% rates on relatively long-dated 10-year paper. None of these companies, obviously, is hurting for cash — but clearly, the lure of cheap money is difficult to resist.
Four pennies borrowed is a penny earned. (It’s not grammatical, but it’s true.)
Indeed, in Intel’s case, it may be especially hard. Yesterday, Nomura Securities put forth the theory that if Intel is particularly astute in the use of its cash, it could actually wind up being paid to take on debt. As the analyst works the numbers, Intel is paying 3% or less interest on its new debt — $0.03 on the dollar. But if the company should take the proceeds of the debt and use it to buy back stock, well, each share of Intel stock today carries with it the obligation to pay shareholders a 4% dividend — $0.04 on the dollar.
Result: Every time Intel borrows a buck to buy back shares, it saves itself a net penny.
As a side benefit, if Intel should spend all $5 billion of its new debt on share buybacks, the company would reduce shares outstanding by 235 million — concentrating its net profits among the remaining shares and adding as much as $0.09 to the company’s annual per share earnings. It would also add about 4% to Intel’s annual earnings growth rate in the process — shocking the heck out of Intel-growth skeptics, I suspect.
Pretty clever, Intel. Kudos.
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See full article from DailyFinance: http://srph.it/oXz0QU