Cash-rich tech stocks such as Dell (Nasdaq: DELL) and Cisco (Nasdaq: CSCO) are frequently berated for either not paying dividends (Dell) or not paying enough in dividends (Cisco). But the critics often ignore that both of these companies are serial buyers of their own stock -- which is financially better than a dividend, since dividends are ultimately taxed twice. Dell repurchased a net 13.91% of its shares from 2007 to 2010, the equivalent of a 3.3% annual and reinvested dividend, while Cisco bought back a net 6.7%, the equivalent of a 1.6% annual and reinvested payout.
Dell is continuing its tradition this fiscal year. The company announced yesterday, in advance of today's annual analyst meeting, that it has repurchased $1.6 billion in stock this year and intends to purchase $400 million more by the end of this fiscal year, ending January 2012. That's a grand total of $2 billion, or the equivalent of paying a juicy 6.5% dividend for 2011.
As a shareholder, I'm happy about this.
You may ask why, since I'm known to be a skeptic of dividends and, by extension, buybacks. And the answer is simple: I think Dell is grossly undervalued, something I've written about lots of times. Shareholders always benefit when management throws money at projects with abnormally high risk-adjusted returns …including its own shares. Cisco, I might add, should step up the buybacks for the same reason.
If Dell's shares (or Cisco's) were overvalued, I'd be the first to rally against their buybacks. But they're not. Thus, I'm a happy Fool, at least for today.
Going after Apple?
Some pundits and analysts are doubtlessly waiting with bated breath to see what Dell has to say today about Apple's (Nasdaq: AAPL) iPad and the potential threat that its tablet and those like it pose to Dell's boring old PC business.
Well, I couldn't care less. I've played with the iPad 2 in stores, as well as Research In Motion's (Nasdaq: RIMM) Playbook, and as far as I can tell there's nothing there that would make me less likely to buy a real computer. Besides, Dell has the Streak 7 for those looking for a 4G tablet on the cheap.
I think Apple and Dell will ultimately coexist peacefully in the tech world, with Dell sticking to enterprise and commoditization and Apple sticking to consumers and innovation. Dell will imitate successfully, and Apple will (maybe) continue to innovate successfully.
It's the circle of (tech) life!
