Recently, we received a comment from a shareholder unhappy with our use of cash and lack of quarterly dividend, so we thought this would be an excellent opportunity to address the topic in the form of a blog post. First, we appreciate the comment and understand that Dell stock is part of many shareholders' savings. Second, shareholders voted on this proposal last year, and 94% of shareholders did not support the measure.
The Board's position has been that shareholder value is best delivered by using the company's cash to reinvest in growth, while returning capital to shareholders by managing dilution through a stock repurchase program. While the writer mentioned P&G, I think it's important to remember that different businesses demand different strategies. Dell's business and the current business climate requires that we pursue growth, which involves investments that will help the company achieve a global position and growth rate necessary to return value to our shareholders. For example, in FY'07 we spent $895M on property, plant, and equipment to support our global expansion efforts; such as new customer contact centers in the Philippines, Malaysia, India, and Canada; new manufacturing facilities in Brazil, India, and Poland; new business centers in Philippines, Malaysia, and Canada; and expansion of design centers in China, India, and Taiwan.
Also, it's important to note that a stock repurchase program offers several advantages over a quarterly dividend: 1) the elimination or reduction of dilution; 2) more flexibility in balancing the return of capital to shareholders with other business objectives; and 3) more flexibility for shareholders to determine when they want to convert all or a portion of their investment into cash.
Dell shareholders will have the opportunity to vote on this topic again at this year's annual shareholder meeting. The Board's members, who are elected by shareholders, regularly consider whether we should pay a dividend and review how we deploy our available cash, while balancing the needs of the company for liquidity, the ability to generate earnings and cash flow, and the most effective means to enhance shareholder value. At this time, we believe we are headed in the right direction.
While I agree with reasons #2 and #3, I strongly disagree that the elimination or reduction of dilution is an appropriate reason to repurchase shares. As a long term owner, I would rather see my ownership stake diluted from options than have the company buy back shares at a price above intrinsic value. I would like to refer you to the following passage from Warren Buffett's 1999 letter to Berkshire Hathaway shareholders.
Rationally, a company's decision to repurchase shares or to issue them should stand on its own feet. Just because stock has been issued to satisfy options -- or for any other reason -- does not mean that stock should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value should be repurchased whether or not stock has previously been issued (or may be because of outstanding options).
Yes, but buybacks benefit only those shareholders, and employees, who actually sell into the offer. There's no real benefit to those who don't sell, right?
Can't say I support the quarterly dividend proposal, yet -- but here's the supporting statement from the proxy statement (in the interests of balance):
<blockquote>The well respected Wharton economist Jeremy Siegel explained
that paying dividends is the old-fashioned, time-tested way
companies show investors their earnings are real and their
bottom line is strong. Dividends provide certainty about the
company’s financial wellbeing and they are also an
attractive tool for investors looking to secure current income.
More recently companies without a dividend history are generally
received favorably when they declare new dividends. In addition,
the percentage of large companies establishing dividends for the
first time is significantly higher now that it has been in the
past. The majority of Dell’s competitors all pay dividends.
Dividends in mature companies that are no longer growing as
rapidly as in the past have been a major component of growth in
an investor’s return once the rapid appreciation phase is
over. At one point in time, Dell was better served by the
current policies of reinvestment in growth and returning capital
to stockholders and managing dilution through stock repurchase
programs. Now as a more mature value company with significant
cash reserves the time is right to declare a quarterly dividend. </blockquote>
Just my two cents ...
Dell should modify its capital structure and take on a little bit of debt. An optimal capital structure (and dividend policy as below) is needed to provide the highest shareholder returns. Having no debt is great - but creating more shareholder value is even better.
I would like to see Dell return cash to shareholders in the form of dividends. The dividend yield should be low (1-2%), while any remaining dispensable cash should be used to repurshare stock when its price is below intrinsic value (per Chris D's post above). Dell can keep a certain amount of cash for acquisitions - but I am very wary of trusting any management with better allocating my wealth, no matter how good its intentions - just having a lot of cash would incentivise management to make costly acquisitions or investments in risky or value decreasing projects.
Innovation is key to long term growth of a company. For so long, Dell direct selling model itself was the 'innovation'. But, competition has copied and become leaner itself. DELL needs to continue innovating and not just following and selling innovative products. Dell should at least have the research division setup to copy the most successful innovative products from competitors quickly.
To Nathan's comment ... buybacks can benefit the remaining shareholders as well as the company basically supports its stock price whenever the share price falls. The company also provides liquidity and decreases the liquitity premium reflected in the bid-ask spread - though in DELL's case, this is hardly a facotr. Buybacks also decrease the number of shares outstanding, thus increasing EPS. The net effect is theoretically equal to dividing up the cash used for buying back the shares among all the shareholders like dividends - but with a tax advantage.
Traditionally speaking, dividends are paid out by mature companies as a way to reward shareholders and the only time dividends should not be paid is when the cash generated by the business can be reinvested to return a farily high ROI with a large degree of certainty.
Clearly Dell is a mature business, and it is a shame that it did not begin paying a dividend a long, long time ago. IMO there is no better sign of a healthy business than a real dividend, and there is no better "check and balance" system than a business that keeps a dividend as part of its business mix.
With that said, considering where the business is at right now, it may be the right move to forsake the dividend for the next 3-6 quarters until there is more clarity that the company is back on track, but the company should commit to a dividend as soon as possible. After what happened over the last few years, I would say management could use the simple discipline imposed by makijng a dividend part of their managerial mix.
I believe that in light of current tax policies in the U.S. and Dell's large size and relative maturity, the Company's management and Board of Directors are doing shareholders a disservice by failing to pay a dividend.
In the current tax environment dividends are taxed at a rate equal to capital gains, and the primary argument previously used in favor of share repurchases to return capital is no longer valid. The Board of Directors should explain to shareholders why this material tax change has not affected their decisions.
Additionally, Dell's CFO has said during a recent conference call that the Company's cash balances are too high. If that is the case, the share repurchase is clearly not working as planned.
Traditionally, a dividend payment is much more consistent and enduring than a share repurchase. The Company, to its credit, has generated consistent operating and free cash flow. But it has not consistently repurchased shares. Clearly shareholders would have been better served over the prior year by a dividend.
In defense of the argument put forward by Chris D., which referenced comments from Warren Buffett, Dell repurchaed zero shares (i.e., $0.0) during the 12-months ending Oct. 07. During that period the stock traded between c. $22 and $30. Yet during the 12-months ended Jan. 06, Dell repurchased $7.2 billion of stock, at levels between c. $29 and $40. This does not seem to be prudent market timing or recognition of under-valued stock.
By paying a dividend, and management can consistently return excess cash to shareholders and allow them to evaluate the valuation of Dell's stock. Management should focus on operations, hopefully their main expertise, and not be concerned with matching repurchase programs to share prices.
I'm a long term shareholder of Dell and would prefer to see a cash dividend paid vs. share repurchases. Dell is currently earning +70% return on equity and really should be returning some of that to it's shareholders. To continue buying back shares and thereby adding to the return on equity, does not benefit the shareholders unless the share price rises as well - which it definitely has not. Perhaps a combination of share buyback to control dilution and a dividend payout is a reasonable comprise. I have a similar view of the situation at Cisco.
@ Jeff L.,
Director, Investor Relations
I believe that any person or entity serious about success is obliged to review results, processes, and beliefs on a regular basis. I first posted to this topic over 2.5 years ago (4-Jan-'08), and I am now reviewing Dell's results over the past few years. I refer to the above Dellshares blog submission posted on the behalf of Dell Investor Relations (dated 26-Nov-'07). That submission argued that Dell, as a growth-pursuing company, should forgo dividends and repurchase its shares in the market. The same post alluded to a comparison between Proctor & Gamble (P&G), a company with a long history of cash dividend payments, and Dell. My inference was that Dell Investor Relations viewed P&G as a staid company well suited for dividend payments, while high-growth Dell should not pay dividends. The same 26-Nov-2007 blog-post stated that Dell "pursue growth...to return value to our shareholders," and also argued "advantages" of share repurchases in lieu of dividends include, "elimination or reduction of dilution," "flexibility in balancing the return of capital to shareholders with other business objectives," and "flexibility for shareholders to determine when they want to convert all or a portion of their investment into cash." At that time I felt Investor Relations' arguments were intellectually hollow. Nearly 3-years onward, I am more certain that they are intellectually hollow, and below I discuss why.
First, let us compare whether P&G or Dell is the "growth" company. In the 5 most recent respective fiscal years, it is P&G that grew many metrics, while Dell mostly shrunk. Over this period P&G grew revenue, gross profit, operating income, net income, diluted E.P.S., cash dividend per share, and cash from operations; each of these metrics declined for Dell (except, of course, for dividends; they remained at zero). I noticed only one metric Dell trumped P&G on: reduction in diluted share count. Five years is not a trivial period. Clearly, the argument that Dell is a growth company unsuited for a dividend seems suspect.
Dell's inference that elimination or reduction of dilution, or to go further, decline in share count, is superior for shareholders versus dividends also fails to support itself. From the time of the 27-Nov.-2007 Investor Relations blog-post to the most recently ended quarter, Dell spent c. $7.3 billion and reduced its diluted share count by c. 11%. Over this same period DELL share price has declined by c. 50%. Going further back, Dell's diluted share count has declined c. 28% over the last 10 years (from c. $31 billion of repurchased stock), but over that period the share price is down over 40%. The benefit to shareholders certainly seems illusive. By repurchasing shares, Dell does not provide investment opportunity to long-term shareholders that retain shares. In contrast, an owner of shares of P&G at 27-Nov.-2007 that has continued to own the shares, would have received quarterly cash distributions that, after paying taxes, could have been reinvested to increase their owned share count by over 6%.
With regard to the "flexibility ... to determine when to convert" a Dell investment into cash, one should note that unlike consistent quarterly dividend payments, Dell has been erratic with repurchased stock. As I pointed out in 2008, Dell spent much more cash buying stock years ago at much higher share prices than at recent depressed levels. Additionally, Dell has been actively involved settling legal and regulatory transgressions of late, and in many recent quarters failed to repurchase any shares. Where is the flexibility for shareholders when no shares are bought? Certainly a quarterly cash distribution provides a more tangible "flexibility."
A reflection on the performance of Dell's share price bolsters the argument that its no-dividend policy is bad for shareholders. Since Investor Relations' 27-Nov-2007 posting, an investment in Dell shares has declined c. 50%. In contrast, the P&G share price has declined c. 18%, but inclusive of dividends, a P&G investor would only be down c. 12%. I certainly acknowledge that share prices are volatile and often not reflective of underlying company results. But my comments are inclusive of several years, which I believe is a valid period for share price analysis.
Finally, it is noteworthy that many companies that grew rapidly over a decade ago, like Dell, no longer hold to their vapid argument that growth precludes dividend payments. For instance, Intel, Microsoft, Qualcomm, Oracle, Applied Materials, and KLA Tencor--all "growth" companies---now pay dividends (and Cisco is reported to soon commence dividend payments). It is also noteworthy that since Investor Relations' 27-Nov-2007 post, shares of each of these dividend paying technology companies have materially outperformed Dell shares.
Upon review, I believe Dell's arguments against dividends are hollow, and shareholders are being punished for Management's and the Board's illogical resistance to dividends.
We messaged at our 2010 Analyst Meeting and during other engagements with our investors our current capital allocation strategy. We believe that the immediate need is to invest in strategic investments that will continue to grow the business and ultimately deliver a higher return for our shareholders. We have restarted a modest share repurchase program of which we bought back $200M shares in both Q1 and Q2 of this fiscal year, FY11. We will continue to balance our strategic needs with this activity based on what we believe will provide the best ROI over the long term for our shareholders.