(By Mani) PC maker Dell, Inc. (NASDAQ:DELL) joined the dividend bandwagon by announcing its first ever quarterly dividend of 8 cents a share after several technology giants such as Apple, Inc. (NASDAQ:AAPL) and Cisco, Inc. (NASDAQ:CSCO) have opted to return excess cash to investors and boost shareholder value.
The payout represents an annual dividend of 32 cents a share, providing investors a yield of 2.7 percent based on June 12 closing price of $11.97. The yield is in line with the returns from the 30-year treasury bonds.
The dividend, which will cost the company about $560 million, is a significant announcement regarding Dell's capital allocation policy and analysts have been expecting that a dividend policy would likely be a key catalyst for the stock, which has fallen 35 percent from its 52-week high.
Shares of the company still need to recover from the beating it got after its first quarter results were lower than last year and missed Wall Street expectations.
Texas-based Dell reported first-quarter net income of $635 million, or 36 cents per share, lower than $945 million or 49 cents per share for the year-ago quarter. Excluding items, it earned 43 cents per share, missing consensus view of 46 cents per share for the first quarter. Revenue for the first quarter fell 4 percent to $14.42 billion, while Street had estimated revenue of $14.91 billion for the first quarter.
"We believe this (dividend) should provide some support to the current stock price after disappointing Apr-qtr results," RBC Capital Markets analyst Amit Daryanani wrote in a note to clients.
Notably, the company announced that it will be increasing its target range for distribution of capital to 20-35 percent of free cash flow from 10-30 percent. Dell generates about $4.5 billion in annual free cash flow implying $0.9 billion to $1.6 billion committed to the distribution of capital.
Though investors could rejoice that Dell has addressed their long fought demand, they should adopt a wait and watch approach as the company is transitioning from a PC vendor to data center solutions and services vendor as soaring demand for tablets is hurting PC sales.
Dell is shifting to higher-margin data center solutions consisting of servers, networking, storage and related software and services from traditional PC sales. The enterprise solutions and services have accounted for 50 percent of gross margin and more than 30 percent of revenue. However, Dell remains committed to a profitable end-user computing business.
The company sees its enterprise solutions, software and services business' compounded annual growth rate through fiscal year 2016 at 10%, representing an increasing percentage of Dell's operating income margin.