Wednesday, June 13, 2012

Dell Initiates Quarterly Dividend

Looks like Dell (DELL) is going to start paying a dividend for the first time on its common stock.

Beginning in 3Q 2012 of the current fiscal year, Dell expects to pay an $0.08 per share quarterly dividend.

Based on  yesterday's closing price of $11.86 the annual dividend yield will be 2.67 percent.

It's something the company would seem to easily have the financial flexibility to do considering its balance sheet strength and free cash flow. To me, the question is and has been whether they can afford to make this kind of consistent payout while also making the necessary investments to continue transitioning the business.

From the press release:

"Our efforts to streamline our operations and shift the mix of our business over the past several years have resulted in sustainably strong cash flow from operations, enabling us to increase the percentage of capital we've allocated to research and development, capital expenditures and acquisitions while maintaining an ongoing share repurchase program," said Brian Gladden, Dell chief financial officer. "The payment of a quarterly cash dividend to Dell’s shareholders adds another element to our disciplined capital allocation strategy."

The company also said it plans to increase its target range for distributing capital to shareholders (via dividends and share repurchases) from what was 10-30 percent of free cash flow to more like 20-35 percent.

In the press release they also point out:

Dell has generated $4.9 billion in cash flow from operations in the past four quarters and has $17.2 billion in cash and investments.

After subtracting debt, Dell's net cash and investments on the balance sheet equals over $ 8 billion or just under 40% of its $ 21.2 billion market value. It's new dividend on an annualized basis equals approximately $ 567 million in cash flow.*

That's not much compared to the $ 3 billion or more the business seems likely to generate in free cash flow this year.

So, yeah, it would seem they have the financial wherewithal to do this. Also, it seems unlikely they'd begin doing this now if they somehow felt their ability to generate cash was about to fall off a cliff.


Small long position in Dell

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* Based upon diluted weighted-average shares outstanding at the end of the first quarter. 
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