Dell Shareholders Like Dividend Plan, Analysts Not So Much
First came a dividend. Now there’s a promise to trim costs. Shareholders appeared to like what they saw from Dell today, as its shares rose by 30 cents, more than 2.5 percent, to $12.27.
Word of the dividend came a day ahead of today’s meeting with analysts in Austin, during which CEO Michael Dell said he plans to make $2 billion in cuts over the next three years. Most of the cuts — about $800 million — will come from a simplifying of sales operations. Another $600 million will come from savings in Dell’s supply chain.
Meanwhile, Dell’s evolving strategy of essentially assembling acquisitions into a credible enterprise-focused IT organization will continue apace. Dell’s target is to make data-center products and services grow by more than 40 percent to north of $27 billion by 2016. During that same period, it expects PC sales to grow by only 8 percent to $47 billion.
The problem, wrote the analyst Rob Cihra of Evercore in a note to clients sent out today, is that no matter how you slice it, half of Dell’s business is PCs, and the pressures of profit margins in that business aren’t going away. Despite Dell’s assurances that it can maintain operating margins on PCs at north of 5 percent, Cihra wondered if sagging margins might force Dell to price its machines higher and lose more ground to rivals Hewlett-Packard and Acer. “We are a bit more concerned than management that Dell can continue walking away from aggressive pricing in the name of margin stability,” he wrote. “We see this setting up as Dell’s seventh straight year of market share erosion.”
So what did analysts think of the dividend? Thumbs down. Shaw Wu of Stern Agee, in a note to clients today, worried that paying a dividend would eat into the cash that Dell needs to keep buying companies to help it continue its enterprise-focused shift.
Wu says at least one motivating factor for Dell to initiate a dividend now is that other companies are doing it, so investors expect it, especially after Apple initiated its first dividend in two decades earlier this year. “While the company did not mention this, we believe a key reason for Dell implementing a dividend policy is that it needs to do so to stay competitive,” he wrote. “In our view, the company not only competes with Apple, HP, Cisco Systems, and IBM in the marketplace, it also competes for shareholders.”