Dell's Curious Dividend Strategy
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Dell (NASDAQ: DELL) announced the birth of their dividend strategy - starting at $0.08 per share quarterly beginning in Q3. The dividend yield comes in at around 2.7% is designed to attract a new classification of investors. Those of the yield and income persuasion are being targeted. Of course the dividend yield is based on a 52 week low.
So the question becomes is this true religion or just a magic trick from a Board of Directors desperate to appear relevant.
Companies which see themselves as dividend yield vehicles execute business models designed to produce stable predictable earnings and cash flow. This usually means being dominant in your markets, offering compelling product offerings which are relevant to customer needs and having control over your cost inputs and supply chain. Dell does not score very high in these categories.
Dell sources two-thirds of revenues from end point devices such as laptops and desktops. It is nowhere in tablets and hand-held devices, which as we all know is where the action resides. Also as we all know the field is dominated by huge giants who also have execution problems.
Dell does have big ambitions in the enterprise solutions business? Hewlett Packard (NYSE: HPQ) and IBM (NYSE: IBM) are already there and probably will not roll over anytime soon. So lets look at a few of the challenges Dell will encounter.
Dell market cap is $21 billion with a stock at a 52 week low. If they are successful in increasing the share valuation will the cash flow move in tandem allowing dividend increases to reward investors.
Hewlett-Packard market cap is $43 billion also near its 52 week lows and with a similar dividend yield. However its seasoned and hopefully past a lot of drama. Meg Whitman still needs to bring home the bacon but holds better cards than Michael Dell.
IBM market cap is $227 billion and the stock is at the upper range of its 52 week pattern. The yield is 1.75%. Admittedly much lower than the others but you have to admit creating a 1.75% on $227 billion is more impressive qualitatively.
IBM total cash clocks in around $12.3 billion, HP cash registers around $8.3 billion and Dell clocks in at just under $14 Billion. Dell clearly has a larger cash stash for now.
So why the conversion to dividend yield. Yes it seems to be the trend. Investor relations departments have finally figured out that the buy and hold investor is the preferred shareholder base. Buy and hold is motivated by dividends.
Dell will need to make acquisitions to meet its ambitions in enterprise solutions. Cash is always nice but most companies would prefer to use their own stock as a currency. Enterprises looking to sell to Dell will be concerned about the long-term strength of a volatile stock. Putting in the dividend stabilizes the beta. It also makes your stock comparable to others and keeps you in the game of buying others.
The problem dividend investors will have will be dilution and a radically changing business model. Will the dividend be safe and sustainable? Time will tell. But Michael Dell is playing a big, very big poker hand. Investors will need to distinguish between a true dividend yield stock and one that is financially engineered for merger and acquistions purposes.
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