Investors rejoice as Dell plans dividend

The tech company's shares are dirt cheap.

By Jonathan Berr Jun 13, 2012 1:00PM
Shares of Dell  (DELL) rose Wednesday after the computer company announced Tuesday that it plans to initiate a dividend. This is yet another sign that Dell's growth days are behind it, but it could present investors with a buying opportunity.

Dell, which Michael Dell founded in his University of Texas dorm room more than two decades ago, has been floundering since Dell the man returned to run his company in 2007. It has routinely disappointed investors and always seems to be a step or two behind rivals when it comes to the latest technology.  

For instance, Dell recently announced that it was reorganizing its sales force to focus on bundling products rather than on individual products, more than a decade after IBM did the same thing. Dell, of course, placed a positive spin on the announcement.

"We have changed the conversation we're having with our customers," he said in a press release. "We are a solutions company first, vertically focused, and creating more value for customers with innovative offerings that provide competitive advantage."

Dell's outlook is not great. PCs, which made Dell billions, are becoming increasingly commoditized. Chief information officers are reluctant to spend money, given the uncertain state of the economy. When they do make purchases, they demand steep price cuts. The days when companies bought software and hardware just because they were the "latest and greatest" are long over.

Dell is starting a dividend because growing organically in coming years will be difficult.   Wall Street analysts expect revenue to decline for the next two quarters. If the economy falters seriously, those forecasts, which have already been lowered, may prove to be optimistic.

Investors looking for yield have better options than Dell. The payment of 8 cents starts in the third quarter, which would equal a yield of 2.7%, lagging those of tech stalwarts like Intel (INTC), whose yield is 3.2%, and Microsoft (MSFT), whose yield is 2.8%. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Despite its problems, however, Dell is not going to wither away. During the past four quarters, it generated $4.9 billion in cash flow from operations and ended the 2013 fiscal first quarter with $17.2 billion in cash and investments. The company can afford to raise its dividend for years to come.

Shares of Dell are certainly cheap, trading at a price-to-earnings multiple of about 6.84, trailing the valuations of Hewlett-Packard (HPQ), Intel,  Microsoft and IBM (IBM). Wall Street analysts have an average 52-week price target of $16.39 on the stock, more than 30% above where it trades now.  

With a rising dividend and a cheap valuation, Dell is a stock investors should consider adding to their portfolios. The shares may become so cheap that Dell the man will take the company private.

Jonathan Berr does not own shares of the listed companies. Follow him on Twitter@jdberr.

 
 
1Comment
Jun 13, 2012 4:27PM
avatar
Good for Dell, get the hell out of consumer gadgets and leave that to the Apple and the Asians. IBM saw the handwriting in the wall. There's a reason why no electronics are made in the USA anymore.
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