Dell dividend cheered, but doubts still linger
SAN FRANCISCO (MarketWatch) --
Dell (DELL) stock closed up 2.6% to $12.28 Wednesday as the computer maker drew cheers for plans to pay dividends and slash costs by $2 billion over the next three years.
The moves sparked a rally, but analysts raised questions on what they meant for Dell's bid to transform itself from a PC vendor into a bigger player in the more lucrative market for corporate information technology.
That push has included acquiring companies in that sector, yet the dividend plan could signal a slower, steadier pace in the reinvention, one that does not involve large-scale mergers, some analysts said.
"The dividend was surprising," Sterne Agee analyst Shaw Wu said in an interview. "Paying a dividend is the right move in terms of enhancing shareholder value. But on the flip side, it takes away funds needed to make large acquisitions or reinvest back into the business."
ISI Group's Brian Marshall said the dividend plan "signals perhaps [that] they are closer to completion with the major deals than not."
Dell has made a series of acquisitions in the past few years, focused on fields such as data storage, networking and IT services. The buys were aimed at moving the company into higher-margin segments of the tech sector.
But the M&A strategy has met mixed reviews. "They've done a lot of those and they haven't really transformed the company," according to Wu. "That's why the stock is near its 52-week low."
Dell's shares have shed about 16% this year, and are down more than 29% over the past three months. In May, the company reported disappointing results, hurt by sluggish IT demand and the impact of tablets on PC sales.
Wu said that Dell may need to go after bigger acquisitions to make the transformation strategy really work. But the dividend plan might make Dell shy away from "potentially larger acquisitions which could be more transformative."
Still, Marshall argued the dividend plan is "proper use of capital."
"[Dell] should have initiated a dividend a long time ago" and "give back to shareholders as growth of company slowed over time," he added. "All these large companies need to continually cut costs as ways to prune their cost structure and continually improve the financial model in a low-growth environment."
In fact, Moody's analyst Richard Lane noted that dividend payments by U.S. tech companies are expected to rise 14% year over year to $26 billion for 2012. The number of U.S. tech companies offering dividends also has risen from 24 in 2010 to 28 at the end of 2011.
Lane said in an interview that he expects Dell "will maintain a very disciplined profile" when it comes to acquisitions, pointing out that company's dividend plan "reflects a trend in the tech sector."
"This speaks to a growing confidence in the level and predictability of cash flows these tech companies are generating," he commented.
IDC analyst Crawford Del Prete said Dell's move also "signals that it's maturing as a company," which hopes to "attract investors looking for dividend-related payout which is more predictable. … In the past, companies like Dell focused on using their cash in different ways."
The dividend plan, he elaborated, suggests that Dell expects "steady growth."
"Dell doesn't expect to see any massive acceleration. I wouldn't expect them to see large inorganic growth."
Topeka Capital analyst Brian White wrote in a note that the dividend helps Dell maintain investor confidence as it undergoes a change. "The long-term evolution of Dell's portfolio remains a positive trend; however, we expect this will take time, but we believe the new dividend will keep investors satisfied during this transition period."
A big problem, Del Prete of IDC noted, is that Dell "still has a big exposure to the less-predictable parts of the business," including personal computers. Dell says a little more than half its revenue still comes from PCs.
Wu of Sterne Agee estimates that 65% to 70% of revenue is still dependent on PC-related sales. "At the end of the day, this company still sells mostly commodity offerings," he said.