After the close on Tuesday, Dell (DELL) announced that the Board of Directors has adopted a dividend policy under which the company plans an initial dividend rate of $0.32 per share per year. Based on the current price, the dividend yield would be 2.7%.
Considering the recent history of share repurchases, this move towards a decent dividend highlights the shift in mindset for the market. Dell has repurchased 14% of its outstanding shares over the last four years and considering the company trades at a sub 6 PE the logic would suggest continuing that plan. Why start a dividend now?
The market, though, has increasingly stated that share repurchases don't work. Sure looking at Figure 1 below suggests that theory to be correct, but where would the stock price be if the company hadn't bought all those shares? The 2014 estimates around $2 would quickly drop to around $1.72 without the share reduction. Investors forget that these moves don't happen in a vacuum.
Click to enlarge.
Figure 1 - 3 Yr Dell Chart
When Apple (AAPL) announced plans for a buyback and dividend, the news wasn't enlightening for the market as it had accumulated so much cash that the company had no choice other than to distribute cash. Not to mention, the distribution plan hardly constitutes an aggressive plan.
Dell on the other hand has a recent history of corporate struggles regardless of the $17.2B of cash on the balance sheet and the $4.9B cash flow from operations in the last 4 quarters. The company might actually need the money to fend off competition and move more into enterprise solutions.
The plan increases the target range of distributions from 10-30 percent to 20-35 percent showing that the company at least remains conservative with the payout policy.
The dividend yield will compare favorably to other tech stocks with Intel (INTC) paying a slightly higher dividend and Cisco Systems (CSCO), Hewlett-Packard (HPQ), International Business Machines (IBM), and Texas Instruments (TXN) paying lower dividends. See Figure 2 below for a recent history of the dividend yields for these tech titans.
Figure 2 - Large Cap Dividend Yields
In this investor crazed market for dividends, this shift in strategy by Dell might just signal the top of the dividend as a favored investment. As the previous chart shows, large cap tech stocks have regularly paid dividends for at least 5 years. Yet not only has Dell started a new policy, but the yield at 2.7% will be the 2nd highest in the group. This signals a significant shift in policy and highlights what might signal a top.
The really odd part is that Dell shifted policy as the President is still pushing forward with a goal of raising taxes on dividends for at least the rich. Now seems like the wrong time to initiate a dividend policy further highlighting that such moves are becoming illogical.
Additional disclosure: Please consult your financial advisor before making any investment decisions.