Dell Shares the Wealth
Tom is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Following other recent moves made by consumer tech companies, Dell Inc. (NASDAQ: DELL) has finally announced its first dividend offering after 24 years as a publicly traded entity. The $0.08 quarterly dividend represents slightly more than an 18% payout based on the corporation’s trailing 12 month EPS, and a not-too-shabby 2.7% yield based on Dell’s $11.97/share closing stock price on the afternoon of Tuesday’s announcement. Shares were up by as much as 5% during intraday trading yesterday and finally settled with a closing gain of 2.5% for the day.
Dell has been rather late to the dividend party considering that close rival Hewlett-Packard (NYSE: HPQ) has long paid a dividend and Microsoft (NASDAQ: MSFT) has been rewarding shareholders for nearly a decade. The trend appears to be permeating throughout the tech sector even more recently, and heavy-hitters including Cisco (NASDAQ: CSCO) and Apple (NASDAQ: AAPL) are also relatively new to the payout game.
It has been suggested that Apple’s dividend announcement would put considerable pressure on other tech companies to begin opening their coin purses to shareholders. Apple’s attractive dividend, which is nearly 30% of the corporation’s EPS (ttm) at the date of the announcement, is in addition to the astronomical growth that shareholders have enjoyed over the past 10 years, after all.
In Dell’s case, however, the news appears to be much more of an announcement aimed at appeasing its wide base of uneasy shareholders than it is to mimic other tech rivals. The corporation’s most recent quarterly report left a lot to be desired – total revenues were down 4% year-over-year and a considerable drop in product gross margins contributed to a 27% drop in EPS compared to Q1 2011. Likewise, the mid-term picture does not appear that it will become any rosier. More than half of the corporation’s revenues are still driven by the sales of laptops and desktop computers, and Dell management stated that the 10% year-over-year drop in notebook sales in the most recent quarter had much to do with the tablet cannibalization trend.
Although this trend is primarily driven by individual consumers who find products like the Apple iPad a suitable replacement for notebooks, the trend is also permeating the business environment as well. A recent Barclays survey of 100 CIOs found that more than three-quarters of them are already deploying tablets within their enterprises, and more than 40% said that the purchased tablets would be replacing laptops. The tablet is not yet standard issue in the enterprise world, but it is quickly becoming one.
Not only have client sales suffered – Dell’s mobility and desktop sales are on a near 3% secular downturn per year over the past five years – but pricing competition has also eroded the corporation’s PC profitability. The announcement during the most recent quarterly conference call that April was also particularly weak due to delayed IT purchases by large enterprises was the icing on the cake.
Perhaps Dell’s newly initiated dividend is the most shareholder-friendly use of its cash-generating abilities. The company has spent more than $9 billion on acquisitions in the past five years, and has made eight acquisitions in the past 12 months alone. Although service and enterprise solutions-based revenues represent an increasing piece of its total pie – 21% of total in 2007 compared to 30% of total revenues in 2011 – the corporation is not astronomically more profitable. An increasing amount of bulkiness due to the cumbersome integration of new acquisitions has led to higher SGA expenses as a percentage of Dell’s top line, and reduced service gross margins and falling PC sales have kept operating margins rather stagnant in the mid single digits.
Instead, investors should view the dividend announcement as a fundamental shift in Dell’s mindset about its own business. Despite extremely heavy investment in its operations via acquisition, Dell is extremely unlikely to jump back into the high-growth period it enjoyed in the mid-to-late 1990s. It is simply too entrenched in the PC business to do so, and other competitors that left the commoditized product market in the early 2000s (i.e. IBM) have already taken a huge piece of the enterprise solutions business that would be Dell’s saving grace. The dividend policy should be viewed as a positive because, even if the annual ~$570 million in dividends being paid out are taken from the corporation’s stock repurchase program, at least it wouldn’t be wasting money on purchasing shares back at fair value. Shareholders can now enjoy a little pie on the side while Dell continues its long-term process of turning around its faltering operations.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
