With interest rates set to rise, investors are increasingly looking to dividend stocks to help generate cash today. Often, that means looking away from the technology sector and toward more mature, less sexy industries. That may be part of the reason why the tech sector is so beaten-down today.
Yet even within tech, there are some dividend gems. One large-cap tech stock just initiated a dividend, its first since going public (for the second time) in 2018. And the company isn't slowly wading in -- the starting yield is a solid 2.65% at today's price. Oh, and the stock is cheap as well.
Dell makes its move
You might think of Dell Technologies (DELL 4.41%) as an old-school, unexciting tech stock. However, with investors now sharpening their pencils on company valuations, it looks highly attractive, especially after a post-earnings dip.
Amid the surge in work-from-home trends, Dell's consumer PC business skyrocketed during the pandemic, allowing the heavily indebted company to generate ample free cash flow. And last fall, Dell spun off its majority stake in software company VMware (VMW). That not only unlocked value for shareholders, but VMware also paid a huge $11.5 billion special dividend to all shareholders, of which Dell received $9.3 billion for its majority ownership.
That has allowed Dell to pay down a significant pile of debt, which the company has had ever since its mega-merger with EMC in 2016. Now having achieved an investment grade rating, Dell is turning to balancing debt paydown with shareholder returns. That not only consists of a $5 billion share repurchase program, which it has been implementing since the spinoff, but also now a $1 billion annual dividend, which amounts to $0.33 quarterly -- a 2.65% yield at today's share price. The dividend was just announced in Dell's recent earnings release, and it has an ex-dividend date of April 19.
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Now may be a time to look at Dell ahead of the dividend payout
Dell generated roughly $5 billion in adjusted (non-GAAP) earnings last year, or $6.22 per share, versus a market cap of just $38.4 billion as of this writing. So Dell trades at around eight times earnings, which is quite cheap indeed.
Yes, Dell still has $16.5 billion in "core" debt outside of the debt it uses in its Dell Financial Services arm, but that debt load is way, way down from the $42.7 billion it had on the balance sheet at the end of fiscal 2019.
Dell also isn't going to shoot the lights out in terms of growth, but it hasn't been too shabby on that front either. Revenue has grown at a 6% average rate for the past four years, and adjusted earnings per share have grown at a 16% rate over the past three. Free cash flow tends to bounce around due to changes in working capital and the timing of capital expenditures, but it has averaged about $6 billion each of the past four years -- higher than earnings, typically, due to high non-cash amortization charges.
Dell intends to grow revenue 3% to 4% annually over the long term and earnings per share by 6%, with free cash flow generally higher than reported earnings. At less than eight times earnings and 6.5 times average free cash flow, Dell is certainly looking like a strong value, even after a big gain last year.
Why the post-earnings dip?
Certainly, the Russia-Ukraine war isn't helping sentiment, and some may feel there could be a hangover after two years of strong PC growth and work-from-home trends.
But Dell also supplies computers and servers to offices and data centers, which suffered during the pandemic. So more office activity could boost that segment to compensate. But if you think hybrid work environments are here to stay, which I do, Dell should benefit. And vis-à-vis the competition, Dell has taken an impressive 460 basis points of market share in commercial PCs and 560 basis points of share in mainstream servers over the past five years.
Management did say on the recent conference call that chip shortages, specifically microcontrollers, were holding back sales, and that higher shipping costs would likely eat into margins this quarter. So there may be some concern over margin declines until those problems are worked out. That could have contributed to the recent dip in the stock price.
However, end demand is still strong. With a leading position in PCs, servers, and storage, Dell should be able to grow along with the current robust IT spending environment going forward. And new areas of computing such as edge computing, 5G telecom networks, and hybrid cloud software offer further opportunities for growth.
With a nice dividend payout and a recent fall in the price, Dell is looking like a solid value stock in today's tumultuous markets.
