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How Does Dell Spell Innovation? Stock Buyback

This article is more than 10 years old.

By Dee Gill

With personal computer sales slowing, cheap competition growing, and a key competitor in a mess of its own making, it’s perfectly reasonable for investors to expect solid Dell (DELL) to make a bold move. Perhaps a big acquisition in a big faster-growing segment, or an aggressive program aimed at taking that top PC sales spot from weakened Hewlett-Packard (HPQ). On Sept. 13, Dell did announce plans to spend $5 billion to buy something . . . its own shares.

Not that anyone is complaining yet. The roughly $590 million Dell spent on share repurchases in the third quarter (spending from an earlier repurchase program) probably helped slow the 20% slide Dell’s share price suffered when double-dip recession worries kicked the markets last summer. With potentially volatile markets in the months ahead, it’s nice to know Dell now has some $6 billion left for propping up its share price in a crisis.

Dell Stock Chart by YCharts

Neither is such massive share repurchasing uncommon among tech companies, which tend to reward a lot of employees with stock options. If they didn’t buy back shares occasionally, the number of outstanding shares would pile up as employees exercised options to buy shares. Dell has authorized some $45 billion in share repurchases since 1996.

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But if Dell’s biggest investments continue to be in its own stock, can shareholders expect much growth in their returns long-term? YCharts Pro rates Dell’s fundamentals as very strong. Dell’s market cap is $28.66 billion and has a pile of cash on hand that’s generally been getting bigger. In that way, it is distinctly different from its biggest rival, Hewlett-Packard.

Dell Cash and Equivalents Chart by YCharts

For the most part, Dell doesn’t have near the troubles of HP, which has made a mockery of itself through boardroom drama and a series of strategy reversals. But on the ground, Dell and HP are equally susceptible to market forces that don’t bode well for their core PC businesses.

PC sales are slowing as consumers rely more on smartphones and tablets, and makers of cheaper PCs are gaining market share. Faced last quarter with the choice of cutting prices or maintaining profit margins, Dell chose to focus on profits.

Dell Operating Margin TTM Chart by YCharts

As a result, Dell got to report a big jump in underlying profits but Chinese PC maker Lenovo passed Dell as the second largest PC brand in the world.

Dell EBITDA TTM Chart by YCharts

Some analysts have worried that Dell’s profit margins will decline next year anyway, as the company faces formidable competition throughout its business. Dell has spent $2.7 billion this year on a handful of acquisitions aimed at diversifying into higher margin businesses, like data storage and network equipment. It also has significantly boosted its annual research and development spending to about $1 billion in search of high-profit products. Still, the company remains foremost a PC seller in a smartphone world.

Dell’s share repurchase program is nice. A game-changing move that positions Dell to stand out in its tough, fast-changing industry would be better. With $5 billion on the table, Dell’s board of directors could think of no better way to spend it than to buy back its own shares. For investors in Dell for the long haul, a little more imagination might be greatly appreciated.

Dee Gill is an editor for the YCharts Pro Investor Service, which includes professional stock charts, stock ratings and portfolio strategies.