Dell Still Doomed Despite Dividend

by Jeff Reeves | June 13, 2012 11:47 am

News flash! Dell (NASDAQ:DELL[1]) will be paying a quarterly cash dividend! Stockholders get 8 cents a share quarterly for a roughly 2.6% yield!

Now, this just in … Dell’s stock still is doomed!

Yes, shares gapped up 4.5% Wednesday on the news. Yes, the dividend is nice. But it’s hardly enough to overlook the ugly numbers Dell has put up lately.

Dell missed EPS forecasts the past two quarters with ugly results. In May, the stock plunged double digits in a single trading day after an ugly Dell earnings report[2] and a weak outlook. Shares are off more than 20% in the past 12 months compared with an 8% gain for the broader Nasdaq index of which it is a member.

And let’s not forget the longer term. Fiscal 2013 earnings and revenue are forecast to be lower than fiscal 2012 numbers — and worse, sales might come in below fiscal 2009 numbers. Shares are down more than 50% in the past five years while the Nasdaq is up almost 11%, and Dell is down more than 50% in the past 10 years despite an 85% gain for the broader tech index.

Kind of tempers your enthusiasm about Dell, don’t it?

The real story here is not that DELL is rewarding shareholders or could be a buy. It’s about Dell doing what other struggling tech giants have done — frantically enacting a dividend as a desperate move for investors’ attention.

Cisco (NASDAQ:CSCO[3]) did it. The company enacted its first-ever dividend[4] early last year … and despite a Cisco dividend increase in March to boost yields to almost 2%, the stock is down 17% since January 2011 vs. a 7% gain for the Nasdaq. And since the increase in March? Cisco again is off 17%, while the Nasdaq is down only 6%.

“But that’s due to this difficult economic environment,” you say. “Not fair.”

OK, how about Microsoft (NASDAQ:MSFT[5])? The company started paying dividends in 2003 — including a big special dividend of more than $3 a share and slow-but-steady increases. Since January 2003, MSFT stock is up about 11%, not including dividends, while the Nasdaq is up more than 110%. If you include the dividends, MSFT is up more than 40% — but that’s still worse than half the performance of the Nasdaq.

The general idea here is that Dell, Cisco and Microsoft all became mature technology stocks with few opportunities for big growth. Some of that was because of scale, of course, but it also was because of these companies’ inability to evolve with the times.

Dell is getting slammed by the mobile revolution, the move to tablets and the general feeling that desktop computers are going the way of VHS tapes and rotary telephones. A dividend can’t change that.

Perhaps most damning of all: Microsoft and Cisco could afford to throw money at shareholders to keep them happy. Despite the quarterly paydays dating back to 2003, Microsoft has more than $53 billion in cash and short-term investments. Cisco has $48 billion. Meanwhile, Dell has a respectable $13.7 billion in cash and investments as of May. With 1.75 billion shares outstanding (give or take), that’s only enough to cover over 20 years’ worth of the current dividend at 8 cents per share per quarter.

What happens if and when the cash flow starts to slow down? How does that leave any money left for big moves like acquisitions or research?

To be clear, the dividend obviously is sustainable, or Dell wouldn’t have done it. The current payout ratio is just 16% of earnings, and the company still is soundly profitable, so it won’t have to dip into its war chest anytime soon unless it chooses to. The company also announced plans to cut costs by $2 billion annually, which will certainly help it keep operations and this dividend humming along.

But the real question investors need to ask is about growth. What does Dell’s sales and profit growth look like in the next five or 10 years? What is the potential of boosting that dividend from 8 cents to 9 or 10 cents a quarter in the next 12 to 18 months?

To me, those prospects are grim.

Put another way, Research In Motion (NASDAQ:RIMM[6]) has almost $2 billion in cash and investments and is soundly profitable. But if it started paying a dividend despite the very real threats of Apple (NASDAQ:AAPL[7]) and other mobile competitors, investors wouldn’t be fooled for a second.

So don’t be fooled by Dell.

Mature tech companies often make the mistake of throwing out dividends once momentum has waned. Microsoft and Cisco prove this out. A better example of a tech dividend payer with legs would be Apple, which instituted its dividend before the go-go days ended and with an admission of the challenges it faces as a mature tech company trying to keep up its history of growth.

Of course, it’s no surprise that stodgy tech companies like Dell can’t follow Apple’s lead on the dividend front if they can’t keep up on the product side, either.

But if you’re an investor, you shouldn’t buy these tactics. Demand growth now and bigger dividends later — and worry about a smokescreen of income meant to change the conversation.

Dell is the same as it ever was: a dud.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[8] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves owned a position in Apple but none of the other stocks named here.

Endnotes:
  1. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  2. an ugly Dell earnings report: http://investorplace.com/2012/05/dell-shares-plunge-on-weak-earnings-outlook/
  3. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  4. enacted its first-ever dividend: http://investorplace.com/2011/03/stock-dividend-increase-cisco-csco-hpq-hp-apd-ash-fult-jah-pdco-wsm-xlnx/
  5. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  6. RIMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIMM
  7. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  8. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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