2 Companies Doing the Right Thing With Debt

I recently wrote a piece about three companies that were making the right decision using debt to fund growth. My thesis was that these companies are paying less than the rate of inflation to borrow, indicating that they are actually, in theory, getting paid to borrow.

However, the list of companies using cheap debt for growth does not stop at three. Indeed, right now, there are many companies that are doing the right thing with debt. Intel (INTC 0.64%) and DirecTV (DTV.DL) are two such companies.

This chipmaker keeps its cash in play
Intel has been using debt to buy back stock as the company's earnings fall. Part of the reason for falling sales is that Intel, traditionally a chipmaker for personal computers, is losing market share to smaller but more innovative peer ARM Holdings (ARMH). As sales of PCs and laptops fall, so are Intel's sales. Meanwhile, ARM is riding the trend for smaller, faster, and lighter chips to power mobile devices.

Now, Intel's total debt has exploded from $2.1 billion at the end of 2010 to $13.5 billion at the end of the fiscal third quarter -- that's a 540% increase. However, digging into the numbers and looking at Intel's debt profile, we can see that $4.5 billion of this debt has a fixed coupon of less than 2%. As the bonds mature during 2017, and inflation currently averages 2.5%, Intel will only be paying back roughly $4.36 billion; Intel is making money on this debt.

All in all, since the beginning of 2010, Intel has reduced the number of shares it has in issue by 10% and has offered investors an above-inflation dividend.  

In comparison, peer ARM is sitting on its cash (cash was 43% of assets at the end of the fiscal third quarter), pays out a token dividend (current yield of 0.4%) and, at 57 times projected full-year 2013 earnings, would be wasting cash buying back stock. The company's growth during the past few years has been impressive, but with so much cash burning a hole in ARM's balance sheet, it seems Intel's investors are getting a better deal.

The direct results of smart borrowing
Meanwhile, DirecTV is bolstering strong subscriber growth with multibillion-dollar debt-funded stock buybacks. DirecTV added 139,000 net subscribers in the United States in the quarter -- nearly double the gain of 70,000 that analysts had expected. Meanwhile, Time Warner Cable (NYSE: TWC) revealed that it had lost more than 300,000 video subscribers.

Actually, this subscriber growth highlights how much of an opportunity DirecTV is. Indeed, not only is the company adding more subscribers than its close peer, but it's also trading at a much lower valuation. For example, including debt but excluding cash, Time Warner Cable is trading at an enterprise-value-to-earnings-before-interest-and-tax (aka EV/EBIT) multiple of 12.6 based on 2012's numbers. Meanwhile, DirecTV is trading at an EV/EBIT multiple of 10.1.

In addition to this low valuation, investors aren't placing a premium on DirecTV's aggressive stock repurchases. In particular, the company has been buying back shares so fast that it has reduced its total number of shares outstanding by 58% during the last five years. What's more, over the same period, earnings per share have risen by 230%.

While the numbers above are impressive, they pale in comparison to the total value of cash that DirecTV has returned to investors over the years. During the past five years, through buybacks funded by both free cash flow and debt, DirecTV has returned $20.6 billion to investors, or $32 per share based on the current number of shares outstanding. It would be hard to beat this return anywhere else.