It’s been a brutal year for Dell (NASDAQ:DELL). So far in 2012, DELL shares are off about 18%, and the company has shed about 15% annually for the past three years.
In an attempt to turn things around, Dell announced its first dividend Wednesday. And at least for a day, the move worked, as shares gained more than 3%. But should you buy Dell in hopes that the momentum will last, or is the new payout just a temporary patch? To decide, let’s take a look at the pros and cons:
Acquisitions: With its strong cash flows, Dell has been purchasing a variety of companies, with a focus on virtualization, storage and the cloud. This is a smart strategy, as these markets should continue to grow. And Dell can leverage its massive user base to monetize its dealmaking.
Cost Cutting: This has always been a part of the Dell culture. To this end, the company said it plans to reduce the cost structure by about $2 billion over the next three years. It will do so by fixing inefficiencies in the supply chain and the sales support organization. In other words, Dell should continue to generate substantial cash flows. Keep in mind that the company currently has about $17.2 billion in the bank. This compares to a market cap of only $21.75 billion.
New Dividend: Dell will pay a dividend of 8 cents per quarter, good for a roughly 2.6% yield on Wednesday’s prices. While modest, it’s still a nice bonus for investors. What’s more, Dell has been aggressively buying back its shares. A quarterly payout won’t help Dell’s cash situation, but it also shouldn’t gum the works up too much, either.
PC Market: The personal computing business is undergoing disruptive changes, especially thanks to the huge growth in Apple’s (NASDAQ:AAPL) iPad and the rest of the tablet market. Unfortunately, Dell has been flat-footed with its tablet strategy. The company also is losing ground to other PC makers. It now is the No. 3 player, behind Hewlett-Packard (NYSE:HPQ) and Lenovo Group.
Macro Headwinds: In the latest quarter, Dell indicated that it experienced a slowdown in its European business. That weakness might extend into the U.S. market, which is showing signs of deceleration.
The Cloud: This could be a big threat to Dell. The rise of cloud computing likely will mean decreased demand for powerful desktop computers as consumers and businesses continue to access more applications from the Internet. As a result, the computing capacity will be centralized in datacenters, not in local hardware.
There’s no doubt that Dell looks attractive on a valuation basis, considering it’s currently trading at just 7 times earnings. But a stock can remain cheap for a long time — especially in the case of a tech company in the middle of a major transition. One need look no further than cases like Yahoo! (NASDAQ:YHOO) and Nokia (NYSE:NOK), where bargain-hunters have found low prices, but certainly not value.
So should you buy Dell? No — for now, the cons outweigh the pros on DELL shares.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.