Dell's Dividend: Music to Investors' Ears

James Rogers

06/13/12 - 04:32 PM EDT

ROUND ROCK, Tex. (TheStreet) -- Dell's(DELL) decision to start paying a dividend was music to the ears of its long-suffering investors, pushing the company's stock up more than 2% on Wednesday.

Shares of Dell have plunged more than 21% over the last 12 months with investors questioning the company's ability to expand beyond its traditional PC business and fend off rivals such as HP(HPQ) and Apple(AAPL). The company's stock, however, closed up 2.55% at $12.27 on Wednesday.

Dell announced plans to start paying a dividend on Tuesday

"The stock price is trading near its lows and last night's cash dividend announcement provides value investors with a reason to own the stock -- we applaud this decision,," explained Brian White, an analyst at Topeka Capital Markets, in a note released on Wednesday. "Dell's balance sheet remains healthy with $17.2 billion in cash and $9 billion in debt, while free cash flow generation was $4.9 billion in fiscal year 2012 - as such, we believe Dell has the opportunity to expand its cash dividend over time."

White upgraded Dell from hold to buy on Wednesday, also citing the firm's improving enterprise strategy.

Dell expects the initial dividend rate to be 32 cents per share per year, or 8 cents per share paid on a quarterly basis. Based on Dell's Monday closing price of $11.86, the dividend yield would be 2.7%.

"We are encouraged that Dell will offer an 8 cent per share dividend," added Keith Bachman, an analyst at BMO Capital Markets, in a note. The analyst, who rates Dell market perform, predicts free cash flow of $4.4 billion in calendar year 2013. "We think about 25% to 30% of free cash flow is generated domestically, or approximately $1.1 billion, and we think this amount will be used for the combined dividends and buy back," he wrote.

Dell is the latest big-name tech company to shift its position on dividends. Silicon Valley icon Apple, for example, announcedplans for a quarterly dividend and $10 billion share repurchase program earlier this year. The iPhone maker last paid a dividend in 1995.

Cisco(CSCO), another famous dividend non-payer, announced its first-ever cash dividend last year, while Microsoft(MSFT)made its first payment in 2003.Dell's dividend yield comfortably surpasses Cisco's yield of 1.93%, and is in line with Apple and Microsoft's offerings of 2.65% and 2.75%, respectively. Dell's PC arch-rival HP(HPQ) has a yield of 2.47%, while IBM's(IBM) is 1.77%.

At least one analyst thinks that Dell was forced to rethink its dividend strategy thanks to the recent moves from Apple and Cisco.

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"We believe a key reason for Dell implementing a dividend policy is that it needs to do so to stay competitive," explained Shaw Wu, an analyst at Sterne Agee, in a note released on Wednesday. "In our view, the company not only competes with Apple, HP, Cisco, and IBM in the marketplace, it also competes for shareholders -- we believe Apple, in particular, puts a lot of pressure on non-paying technology companies."

Wu, who sees Dell's dividend as a positive step in creating shareholder value, nonetheless warns that it may not be the best path for the company.

"We question if this is the most effective use of cash given the company's far from complete effort in transforming itself beyond commodity industry standard offerings," he wrote. "We still believe Dell needs to take bolder, more aggressive steps to reinvent itself."

Wu has a neutral rating on Dell.

--Written by James Rogers in New York.
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