Tag Archives: Dividends

Intel (INTC)’s $6 billion bond offering

December 6, 2012 By in Dividends, double taxation, Stock ideas Tags: , , , , , , , , Leave a comment

INTC has just filed a prospectus with the SEC for a proposed $6 billion bond offering.  The securities it intends to sell are as follows:

Title of Each Class of
Securities To Be Registered		 Amount To Be
Registered		 Proposed Maximum
Offering Price
Per Unit		 Proposed Maximum
Aggregate
Offering Price
1.350% Notes due 2017 $3,000,000,000 99.894% $2,996,820,000
2.700% Notes due 2022 $1,500,000,000 99.573% $1,493,595,000
4.000% Notes due 2032 $750,000,000 99.115% $743,362,500
4.250% Notes due 2042 $750,000,000 99.747% $748,102,500

Several aspects of this offering are interesting:

1.  INTC says it will use the proceeds for general corporate purposes (this is the boilerplate answer to the use question) and to buy back stock.

The dividend yield on INTC shares at a price of $20 each is 4.5%.  Total interest expense for the offering, ignoring accretion of discount, will likely be $142.875 million, meaning INTC is paying a blended interest rate of 2.38% for the money it will receive.

Unlike dividends, interest payments are a deductible expense for income tax.  After tax, the interest rate is 1.55%.  So for every share of stock INTC buys it will pay out $.31 in annual interest but save $.90 in dividend payments.  So the issue makes INTC’s cash flow go up. A $1 billion buyback at current stock prices would add about $30 million to annual cash flow.

2.  Why an offering now?

A short while ago, INTC boosted its quarterly per share payout to $.225, even though the company knew its new product spending would remain very high through this year.  Companies typically don’t raise the dividend based on future earnings potential;  they do so based on the idea that they have plenty of extra cash, come what may.  In other words, INTC thought it had lots of money to spare.

What’s changed?

–for one thing, the stock price is a lot lower than I would have expected, and the dividend yield is very high.  The chance to buy INTC assets for less than management thinks they’re worth + being paid through dividend savings to do so, the opportunity may have been too good to pass up.  I think this is the main reason for the fundraising.

–INTC’s operations generated over $5 billion in cash during a (relatively weak) 3Q12 alone.  The company also has about $11 billion in cash and short-term investments on the balance sheet.  So why borrow?   …presumably because the bulk of that money is located outside the US.

3.  My initial reaction on seeing the announcement was that problems had developed with planned cash flow in the US.  I don’t think that’s correct, though.  The US has been weak for a while.  It’s emerging markets that have been surprisingly bad for INTC recently.  And those profits presumably remain overseas.

In other words, I don’t think the offering comes as a result of adverse internal cash flow developments.

4.  INTC may be figuring that current low rates won’t last very long.  To me it’s striking that the company is raising 20-year and 30-year money.  Why else do that today?

my conclusion:  I’ve written about confirmation bias recently, partly with INTC in mind.  If I’m suffering from it, INTC’s board is, too.  In any event, the company’s indicated intention to buy back a significant amount of its shares appears to be what’s behind the stock’s current strength.  My guess is that this strength will continue for a while more.

 

I’ve just updated Keeping Score for November 2012

December 2, 2012 By in Analyzing performance, Keeping Score, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

I’ve just updated Keeping Score for November.  As I went to the KS page, I realized for the first time that I didn’t write an update for October.

Of course, I had no electric power, no heat, no internet and only on-again, off-again cellphone service–and I wasn’t going to write posts on a phone anyway.  The roads were blocked by fallen trees and downed power lines, so I couldn’t go to the local Panera or Starbucks to write.

If you’re on the blog, you can click the tab at the top of the page.

large one-time dividends in 2012: why they drive stock prices up

November 28, 2012 By in Current Market Thoughts, Dividends, Recent Market Action, Stock ideas Tags: , , , , , 2 Comments

big payouts

A significant number of publicly traded companies in the US are declaring large special (i.e., one-time) dividends to be paid before yearend.  In every instance I’ve seen–the latest being LVS and COST–the stock has gone up significantly on the announcement the company is taking this action.

two tax reasons

There are two reasons for this, the first of which relates to the current income tax preference for dividend income (a maximum 15% federal tax rate) versus “ordinary” or “earned” income (a maximum of around 40%).  They are:

1.  The reasonable supposition that the income tax on dividends will go up in January, either as part of a political deal to avoid the “fiscal cliff” or in a subsequent, more general reform of the tax code whose provisions are made retroactive to January 1st.

A dollar in dividend income today nets the taxable recipient $.85.  In January, it may only have an after-tax value of $.40.

Let’s say, to make the numbers easy, a stock is trading at $100 a share.  It has $8 a share in excess cash.  It has no sure-fire investment projects that have the potential to make large future gains, so that $8 will remain $8 in present-value terms.  For a taxable investor, that $8 a share inside the company is worth $4.80 if it will be paid out after December 31st.

If, however, the entire $8 is paid out in 2012, it is worth $6.80 after-tax–a $2 difference.  So the taxable investor is $2 better off because of the dividend payment.

That’s not the whole story, either.

2.  When this stock goes ex-dividend, its price will presumably drop by about $8, simply because the ex-dividend buyer isn’t entitled to the $8 dividend.   In a very simple world, the $100 price falls to $92.

For the taxable investor who buys the stock for $100 right after the dividend announcement, the fact of going ex-dividend “manufactures” a short-term tax loss of $8.  This loss can be used to shield  otherwise taxable income at the holder’s highest marginal tax bracket.

If that rate is 40%, then the tax loss is worth $3.20.  (For what it’s worth, the part of T. Boone Pickens’ reputation that doesn’t come from relentless self-promotion is based on creating dividend situations like this on a massive scale.  There was also a one time a type of investment vehicle, called a dividend capture fund, whose main purpose was to capture the tax benefits of dividend-paying stocks going ex. )

#1 and #2 together make $5.20.  So the declaration of the $8 dividend has made the stock 5%+ more valuable to taxable investors than before.  In theory, the stock should rise on the dividend announcement until that “extra” value disappears.  That’s also what’s actually happening.

Of course, to use the short-term loss the holder has to sell the stock, creating downward pressure on the price once it goes ex-dividend. But at the same time, non-taxable investors, for whom there are no tax benefits, may be attracted to the issue and lend support because of the substantially lower price.

worth looking for?

For highly specialized professionals, yes.  For the rest of us, no.  One of the first lessons I learned as a portfolio manager is that you should focus all your time trying to find the 30% gains, and the 50%s and the 100%s.  If you see a 5% on the ground in front of you, pick it up.  Otherwise, the gain is too small to spend time on.

So, while it’s nice to understand why a stock is going up, these aren’t worth chasing.  Nor, in my view, is searching for stocks where a large potential special dividend payment is the major attraction worth the time and effort.

why a post-election selloff?

November 9, 2012 By in Current Market Thoughts, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

it’s all about taxes…

…in a very “small ball” sense.  Without action in Washington, G W Bush era income tax cuts will expire.  Two tax reductions affect investors directly:

–dividends from stocks, now taxed at 15%, will become taxable as ordinary income–meaning at about a 40% tax rate for the highest income holders, and

–similarly, the capital gains on the sale on stock held for more than a year will become taxable as ordinary income, rather than at the current 15% rate.

If–and I think that’s really IF–these tax breaks disappear, three consequences follow:

1.  stocks in general become somewhat less valuable to taxable investors,

2.  within the stock market, dividend-paying stocks become somewhat less attractive, since for high-income holders the after-tax yield is cut by 30%, and

3.  high-income investors having large gains in stocks they hold may be persuaded to sell before yearend.   Contrary to normal prudent practice, investors holding stocks with losses may consider not selling them until the new year, where those losses may  have greater value.

two counter-moves

IF the tax rule change, it seems to me that:

1.  Roth IRAs holding income stocks become much more attractive, and

2.  the mammoth tax losses that mutual funds and ETFs in existence prior to 2008 still have on their balance sheets become considerably more valuable.

adjustment implies selling

AAPL is probably the poster child for this.  Suppose you bought AAPL a few years ago at, say, $100 a share.  It’s now about $535. If you sold today your Federal capital gains tax would be $435 x .15  = $62.25 (remember, there may be state taxes as well).  If capital gains were taxed as ordinary income, your tax could be $435 x .40 = $174.  So, if you had a thought in your head about selling, you’d certainly prefer to do so in 2012.

talking heads are already pushing this idea

That really scares me, since these guys are in the vanguard of the army of dumb money investors.  We all thank goodness they’re there, since their existence–like that of doctors, lawyers and dentists (sorry, if you’re one of them)–lessens the chance that we’re the dumb money ourselves.  But generally speaking their “advice” is toxic.

what I’m doing

As usual, not much.  I’ve got to think hard about sector funds instead of some individual stocks, and about establishing Roth IRAs.  But my only concrete decision is to defer selling losers until January.  In this, my assumption is that we won’t know about any tax changes before yearend.

If we do hear about higher taxes on investments this month or next, I’d expect a ton of tax-related selling to ensue.  The best long-term growth stocks would likely be hit the hardest.   That would probably be a very good chance to buy.

what makes casino stocks interesting investments

October 25, 2012 By in Casinos, Dividends, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

I started covering casino stocks as a securities analyst around 1980.  At that time, Atlantic City was still the hot, fast-growing market that investors focused on, although the bloom there was already coming off the rose.  Las Vegas was a backwater.  Neither Singaporean nor Australian casinos existed (legal ones, anyway).  Macau, then a Portuguese colony, was a Ho-family monopoly.

In those days, casino operators basically gave away food, hotel rooms and entertainment.  Non-gaming operations were cost centers, existing solely to induce customers to visit the gaming floors.  That situation has changed dramatically over the years.  In pre-Great Recession Las Vegas, which is the gold standard for today’s global gaming industry, non-gambling operations had risen to equal importance–and profitability–with the gaming floors.

It’s not so much that I find the gambling activities themselves so interesting.  As a professional portfolio manager, they used to remind me a lot of work–but with substantially diminished chances of making money.

Instead, what attracted me to casino stocks as an investor–and still does– is that:

–casinos are very cash generative once they’re up and running, and

–they’re relatively simple to analyze.

Under most circumstances, growth in gambling revenue is a direct function of two variables.  They are:  the increase in nominal GDP of the area where target customers live; and any increase in casino floor space.  So gains in gambling earnings are highly predictable.   Resort profits aren’t as easy to project, but they’re not much more difficult, either.

One caveat:  like many commercial property-based businesses, expansion of Las Vegas-style casinos only comes in $1 billion-plus increments.  So the gaming industry can be subject to periodic bouts of overcapacity, when, after a run of profitable years, everybody in a certain area decides to make a major expansion at the same time.  Think of the current situation in Las Vegas–although that’s by far the worst overcapacity I’ve ever seen.

Funnily enough, it’s precisely the disastrous last-decade expansion in Las Vegas and the current slowdown of gambling in Macau, where the Big Three of American casinos (Wynn, Sands and MGM) all have operations, that make WYNN and LVS attractive.  (As regular readers will be aware, I’m not a fan of MGM.)

Why?  The companies are generating tons of cash and they have no place to plow it back in to new casinos.

In the case of LVS, this means it’s repaying borrowings much faster than I think the consensus realizes.  As for WYNN, the company has just announced a special dividend of $7 a share.  It’s increasing the regular quarterly payout as well, from $.50 to $1.  This means the shares have a prospective yield of  3.4%.

More on WYNN tomorrow.