Dude, It's Not Enough
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dude, you're getting a dividend! I was about two months early in calling for a dividend from Dell (NASDAQ: DELL). In my prior post, I said that “with $4.85 billion in free cash flow over the last four quarters, and about $2.7 billion in share buybacks, the company still added about $2 billion to its investments last year.” I guessed that with all of this free cash flow that Dell could afford a dividend of about $0.50 per share. Well, the company didn't quite get there, but the just announced $0.32 annual dividend is better than nothing. This payout gives the stock a yield of 2.61%, which is decent. The problem is, it's not enough to save this stock.
Let's be clear, I'm a fan of Dell. In fact for years I always looked to Dell for my PC needs. However, the company was beat out on price several times by Hewlett-Packard (NYSE: HPQ), and essentially stopped being as price competitive as they used to be. CEO Michael Dell was very clear in the announcement of the dividend of his intentions for the company going forward, saying the “shift that we've made to the enterprise solutions business” was one of the main reasons the company was comfortable paying a dividend at this time. He also made the point that the company has almost $20 billion in enterprise solutions and services and is generating significant cash flow. While the point of free cash flow is well made, my concern is the areas that Michael Dell expects the company to grow. The CEO said he expects the company can grow in the areas of server-storage, networking and security.
Diving into these markets further will put Dell up against some of the most well capitalized and fierce competitors the company has ever faced. While I got some criticism in my last post about comparing Dell to EMC (NYSE: EMC), Mr. Dell's assertion that the company can grow in the area of server-storage is to say that he wants to take on EMC. To quote EMC, the company “leads the market in worldwide network-attached storage (NAS).” EMC moved up from #2 to #1 with 41.7% of the market and an annual growth rate of 89.9%. Dell competes in this field, but with 1.2% of the market and a growth rate of 13.2% the company's not in the same ballpark as EMC. If Dell expects to compete in this market, they are going to have a long hard climb.
As another example, Mr. Dell also mentioned networking as another field where he expects Dell can show growth. Growth is one thing, but if you say the word “networking,” most people think of one company - Cisco Systems (NASDAQ: CSCO). Cisco leads the way in nearly every major networking category. To give you an idea of the difference in financial clout, Cisco produced about $2.69 billion in free cash flow last quarter, to Dell's adjusted free cash flow of $1.14 billion. In addition, while Dell's cash and investment total of over $18.5 billion is impressive, it doesn't come close to the more than $51 billion that Cisco is sitting on. This is not a competition I would be willing to bet on Dell to win.
Investors might say the dividend changes the reasons for investors to consider Dell. To be blunt, Dell could have initiated this dividend several years ago. Based on the last full year financials, the current dividend would only use about 11.5% of Dell's free cash flow. For a company expected to grow earnings by just 6.13% over the next few years, this 2.61% dividend is a step in the right direction, but still only gives investors an expected 8.74% total return.
IBM (NYSE: IBM) is the company Dell seems to want to be. IBM has already made the transformation of a hardware vendor turned solutions company. Compared to Dell's 6.13% expected EPS growth, analysts are calling for over 11% EPS growth at Big Blue. IBM's dividend might not be quite as large with a 1.72% yield, but this dividend only uses about 22% of the company's free cash flow based on last year's financials. In addition, IBM has raised this dividend every year for over 10 years straight. With a combined total return of 13.21% and a forward P/E of 13.11, IBM seems like a decent value.
Dell may end up being a decent turnaround play, but the odds just don't seem to be in the company's favor. Going up against the likes of IBM, HP, EMC, and Cisco make the odds of a successful turnaround even worse.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of EMC and International Business Machines. 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.
