As investors have made a shift towards favoring dividends, companies have had to adapt. Unless your growing by leaps and bounds, you better start paying a dividend. Such is the situation EMC (NYSE:EMC) and many other old techs such as Oracle (NYSE:ORCL) and Cisco (NASDAQ:CSCO) have been put in.
EMC is a very "quiet" tech company. You rarely hear about it in the media, and the CEO is rarely seen on popular conferences. This is unlike many other large tech CEOs such as Cisco's John Chambers and Oracle's Larry Ellison. I doubt anyone could tell that EMC is a $50 billion dollar company.
EMC is just the kind of company that fits into a valuation portfolio. It trades at 14.5 times this years earnings and has a clean balance sheet of $11.15 billion in cash and $7.2 billion in debt. It recently started to pay a dividend, albeit a small one to compete with Netapp (NASDAQ:NTAP). Even thought the dividend it only 1.6%, the current payout ratio is 8% so EMC can easily raise it for years to come. To go along with EMC's initiation of a dividend, they also granted a $6 billion dollar buyback which would allow it to buyback nearly 12% of the company. EMC's real value doesn't come from being a leader in high end data storage (the cloud), or being one of the largest providers of enterprise software in the world, but from its large holdings in VMware (NYSE:VMW) and the soon to be spun-off of Pivotal.
In 2007 EMC thought of an ingenious way of creating shareholder value by offering shares of VMware to the public. By doing this, the market would correctly value shares of VMware aside from EMC's data business. It also allowed investors to choose which business they wanted to invest in by essentially allowing people to choose between the fast growing virtualization software industry and the slow growing, yet stable data storage business. The ipo was a huge success and may soon be repeated with Pivotal. Pivotal is a spin-off of all the assets that couldn't be internally monetized properly by EMC and VMware. The spin-off will allow it to focus more on its core businesses. Pivotal will have an estimated revenue of $300 million this year with hopes of becoming a billion dollar business in 5 years.
As of today EMC owns nearly 80% of VMware which currently has a market cap of $33 billion. Therefore EMC owns $26.4 billion of VMware. In addition EMC will own 69% of the Pivotal with VMware owning 31% but because EMC owns 80% of VMware, the real position is closer to 94%. If I were to give Pivotal a conservative valuation based on its growth prospects and peers I would value the company at close to $3 billion when it goes public. Therefore investors are paying just $21 billion for EMC's core business.
I find it incredible that the market has yet to realize how cheap shares of EMC really are. The way I am taking advantage of this is by selling the January $23 strike put for $.69 (3%). This would provide a buffer if the market were to continue falling due to the uncertainty of Washington.
Additional disclosure: I am long EMC by being short puts.