Last December Intel (INTC) sold $6 billion in bonds to fund a buyback of its own stock. The issuance came despite the company having some $3.5 billion of cash and cash equivalents and another $7 billion of short-term investments on its balance sheet as of the end of September.
Intel is only one example of a fistful of Fortune 500 companies issuing debt to buy stock, but their status as a big-name Blue Chip with a pristine balance sheet and history makes them a great case study.
Intel's bonds were expected to be rated A1 by Moody's, meaning the interest paid by Intel would be anywhere from 0.75% to 1.5% higher than like-dated government securities. Despite being a curious shuffling of the balance sheet for a company so liquid, being able to buy stock at a borrowing cost of under 5% is supposed to be bullish.
Based on Intel's investing track record for buying back shares, the company would be better off investing in magic beans or putting the cash in a checking account.
Intel's Buyback History since 2003:
- 2.5 billion shares purchased at an average price of $22.36
- Total cost of repurchase: $55.894 billion
- Current value of shares purchased: $52.5 billion
- Annualized ROI of buy and hold investor, including dividends: 4.8%
- Estimated Intel return, including dividends not paid: 0%
Over the last 10 years Intel has spent about $56 billion to buy what is now $52.5 billion of stock. Counting the dividends Intel didn't have to pay, the company's return on investment from these purchases was roughly zero. By comparison if you bought Intel for yourself at the beginning of 2003 and reinvested the dividends, your return would work out to some 59% or 4.7% annualized.
In other words, the board of directors — a group that ostensibly knows more about the company than any outsider — dramatically underperformed buy and hold money. If you bought shares alongside these insiders to the day in clear violation of securities law you would be subject to federal prosecution and you would've lost money.
If buybacks tend to be risk-laden distractions, why do companies keep doing them? Greg Milano, CEO of Fortuna Advisors, says it's because buybacks make the stock look cheaper. For every share taken off the market, earnings on a per-share basis rise, in theory making the stock look cheap and bringing out the buyers.
It's a nice theory but total garbage. As Milano notes, every dollar spent buying back shares is money that doesn't go into the fundamental business. Over time, a lack of investment in the fundamental business of a company weakens it on a competitive basis and devalues the stock.
How could an investor play the buyback game? "It's almost like you want to wait until a company has announced a buyback and then sell it and move into something else. You could envision a strategy where you do that repeatedly, but I've never seen anybody actually put that work and stick to it," says Milano.
He's never seen anybody do that yet. Any takers out there willing to give it a shot?