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Does Dell's Dividend Make Sense?

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Tech giant Dell (Nasdaq: DELL  ) recently announced its intention to pay a dividend to shareholders. The company was mulling a dividend payout last year in July, but the idea never materialized. Now that the company has joined the ranks of Apple and many other tech stocks in terms of paying dividends, does the move make sense for Dell? Let's find out.

Is Dell's dividend justified?
Dell, in its recent analyst meeting, said it will pay a dividend amounting to a yield of roughly 2.7%. However, Dell hasn't been performing too well recently. The company's first-quarter revenue declined 4% from the prior year's period. Net income also dropped significantly, by almost 33%. Margins reveal how dismal the situation is, with gross margins falling by about 160 basis points and net income margins by 190 basis points.

So, what was Dell's rationale?

The company said it plans to cut costs to the extent of $2 billion over the next three years and plans to do so by streamlining its supply chain and consolidating its sales force. Apart from that, the company also expects to generate cash through boosting its non-PC businesses such as its software and services segments and through its recent acquisitions including Wyse Technology, SonicWall, and Quest Software (Nasdaq: QSFT  ) , which Dell just announced on Monday that it's buying for $2.4 billion.

In addition, Dell's PC business is expected to return to prior revenue levels in the coming years. The company estimates that its end-user computing business will bring in a whopping $47 billion by 2016, mainly driven by sales in emerging markets and bringing the sales number back to prior levels. It should also be able to drive growth from the higher-margin enterprise segment through the sale of servers, networking, and storage equipment.

Should you buy Dell for the dividend, then?

Dell's PC business still pulls in approximately half of the company's top line, making the company largely dependent on a rather sluggish, low-margin part of the tech industry. According to Gartner, the company's worldwide PC shipments declined by 1.6% from the previous year's quarter, while industry growth grew was an anemic 1.9%. Also, growth in the enterprise segment is certain to be challenging as Dell goes up against more entrenched competitors such as IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) , both of which experienced some weakness of their own in enterprise hardware last quarter.

These headwinds, along with the disappointing streak of earnings the company has produced over the past few quarters, don't exactly put me at ease. So while a dividend might sound good for investors, I'd certainly keep an eye on Dell's ability to grow its top and bottom line, because that's what should really matter.

A few Foolish last words
Dell is still transitioning away from its dependence on sales of personal computers. While it does predict decent growth in non-PC areas such as its software business, I would keep an eye on its overall business performance rather than take a leap just for the dividend. Add Dell to your free Watchlist, and let us know what you think about Dell's dividends by leaving your comments in the box below.

If you're interested in other dividend paying companies, you can check out the three Dow stocks dividend investors need. This special free report names three sustainable businesses that love to reward their shareholders with dividends. Claim your copy of this limited-time report today.

Fool contributor Keki Fatakia holds no shares in any of the companies mentioned in this article. The Motley Fool owns shares of IBM and Apple. Motley Fool newsletter services have recommended buying shares of Apple, creating a synthetic long position in IBM, and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2012, at 6:09 PM, melegross wrote:

    When one considers that Dell has been wrong for years now over it's growth and profitability, why would one believe it now?

    It's end user PC business up to $47 billion in 2016? Sounds like a pipe dream. I'm not so sure they will maintain the sakes they have now. Their record is poor.

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