Despite the tech-heavy Nasdaq Composite's nice 12.5% year-to-date gain this year, shares of computer company Dell Technologies (DELL -2.96%) have floundered. The stock is down more than 3% since the start of the year. Even worse, that adds to the stock's 29% decline last year. But now is not the time for investors to run away from this stock, according to one analyst. On the contrary, Goldman Sachs analyst Michael Ng thinks shares are a buy today.
Here's why this analyst may be right.
The path to $43
Though Dell's business is cyclical, Ng thinks the worst of the company's cyclical downtrend may soon be over. Furthermore, the analyst believes that the stock's cheap valuation has priced in tough times, anyway. As of this writing, the stock trades at less than 12 times earnings. Even more, the stock trades at just 8.3 times analysts' average forecast for adjusted earnings per share over the next 12 months.
Given the tech company's likely turnaround in earnings in the near future and its cheap valuation, Ng gave the stock a buy rating and a 12-month price target of $43. This translates to more than 10% upside for the stock based on where shares are trading at the time of this writing.
The analyst says he expects significant free cash flow from stock. As you'll see in the following two sections, strong free cash flow is helping the company return boatloads of it to shareholders through dividends and repurchases.
A robust dividend
The stock is particularly attractive when investors consider its cheap valuation alongside its meaty dividend. The stock currently has a dividend yield of 3.8%. This dividend yield is well above the average dividend yield of 1.7% for stocks in the S&P 500.
Dell stock's impressive dividend payout would, of course, add to any returns that come from price appreciation in the future. Even more, investors could likely count on the payout even if the stock declined. After all, Dell's dividend looks secure since the company is currently paying out less than 40% of its earnings in dividends.
Dell recently announced a substantial increase to its dividend. Earlier this month, the company said it is increasing its quarterly dividend by 12%. The dividend increase, Dell Chief Financial Officer Tom Sweet explained in the company's fourth-quarter earnings release, reflects "our confidence in our long-term business model and ability to generate and grow our cash flow over time."
The company's next dividend is payable on May 5 to shareholders of record as of April 25.
Share repurchases
Of course, dividends aren't the only way the company is returning cash to shareholders. It's also doing it indirectly via share repurchases. Highlighting how significant Dell's capital return program is, it spent $3.8 billion on dividends and share repurchases combined during its recently ended fiscal year. This translates to more than 13% of the company's current market capitalization.
Ng seems to be onto something. The stock does appear to be undervalued. Of course, there's always risk to buying any stock, and investors should do their own due diligence before they buy shares.
