When Apple (AAPL) announced its massive $60B stock repurchase program and 15% dividend increase earlier this quarter, I postulated two things. First, the huge amount of stock buying the company planned to do over the next ~30 months would successfully put a floor under the shares. Second, this capital allocation decision would have a "ripple" effect and attract many imitators within the tech space.
So far my thesis has played out in that Apple has put in a nice floor around $420 a share since news of the company's capital allocation strategy sunk in with investors. In addition, numerous large cap tech stocks like Cisco Systems (CSCO) have announced significant dividend increases and/or stepped up repurchase programs since Apple's game changing move. EMC Corporation (EMC) became the latest tech equity to follow Apple's lead this morning. This is something I thought the company would do for quite some time. This market leading storage provider announced today:
- The company will initiate a quarterly dividend for the first time of a dime a quarter. The payout will give EMC a yield of ~1.7%.
- EMC also announced that it is increasing its stock repurchase program to $6B from just $1B, of which at least $3.5B will be utilized by yearend 2014. At current prices, this program will remove ~12% of the company's float.
EMC was undervalued before this announcement and this announcement could be the catalyst that moves the stock much higher.
5 additional reasons EMC is undervalued at just over $24 a share:
- Analysts expect EMC to grow revenues at approximately 8% annually over the next two fiscal years and the stock sports a five year projected PEG of under 1 (.96).
- The stock is cheap at 11.5x 2014's projected earnings given this revenue growth as well as the new dividend yield/stock repurchase program.
- EMC is trading near the bottom of its five year valuation range based on P/E, P/S, P/CF and P/B.
- The company has over $4B in net cash on its balance sheet as well as an 80% stake in fast growing software provider VMware (VMW). Taking out these two items, EMC's underlying storage business is being given a significantly lower valuation than that of competitors like NetApp (NTAP) by the market.
- The 34 analysts that cover the stock have a median price target of $29 a share on EMC. I would expect several upgrades/price target raises in the coming weeks on the back of this capital allocation decision.