For You Believers in DELL

[tombgrt]

This was what I was getting at A-Hamilton. The issuance of a dividend was an obvious hint that capital allocation might not be all that great. It seems to me that if they lower buybacks now, that would only reinforce my thoughts on capital allocation at Dell. Why issue dividends now with the business priced at 4-5xFCF and the need to get acquisitions at reasonable prices to increase market share and moat when the opportunity arises?

 

Thank you for your input PlanMaestro, I appreciate it.

Tombgrt,

I don't know if you are a shareholder or not, but for what its worth I about jumped thru the phone at DELL IR the day of the announcement. I'm sure Longleaf was just in pure shock.

 

I'm not and haven't been so far. That might change in the future. I'm sure they were in shock, just like Prem Watsa probably was. I just don't see how this can ever be a good move. Maybe someone can explain the rationale to me.

 

I believe the company is quantitatively cheap but generally I look for certain qualitative elements. Great management is a plus and capital allocation is just one of the factors. I absolutely love owner-operator companies but they make mistakes too. Just look at DWA and what happened there with all the buy backs, total waste imo..

[ERICOPOLY]

This was what I was getting at A-Hamilton. The issuance of a dividend was an obvious hint that capital allocation might not be all that great. It seems to me that if they lower buybacks now, that would only reinforce my thoughts on capital allocation at Dell. Why issue dividends now with the business priced at 4-5xFCF and the need to get acquisitions at reasonable prices to increase market share and moat when the opportunity arises?

 

Thank you for your input PlanMaestro, I appreciate it.

Tombgrt,

I don't know if you are a shareholder or not, but for what its worth I about jumped thru the phone at DELL IR the day of the announcement. I'm sure Longleaf was just in pure shock.

 

Longleaf can just use it's dividend to buy more shares.  It should make little difference to them mathematically in terms of the compounding record of their fund.

 

[A_Hamilton]

This was what I was getting at A-Hamilton. The issuance of a dividend was an obvious hint that capital allocation might not be all that great. It seems to me that if they lower buybacks now, that would only reinforce my thoughts on capital allocation at Dell. Why issue dividends now with the business priced at 4-5xFCF and the need to get acquisitions at reasonable prices to increase market share and moat when the opportunity arises?

 

Thank you for your input PlanMaestro, I appreciate it.

Tombgrt,

I don't know if you are a shareholder or not, but for what its worth I about jumped thru the phone at DELL IR the day of the announcement. I'm sure Longleaf was just in pure shock.

 

Longleaf can just use it's dividend to buy more shares.  It should make little difference to them mathematically in terms of the compounding record of their fund.

 

I hope their thinking is more complex than that. The dividend has to come from repatriated USD (as do share repurchases), and so the dividend has an impact on taxes Dell pays today and whether it acquires companies with foreign or domestic cash. Additionally, now there is the lame institutional imperative to pay a dividend when it may make sense to do a larger acquisition, pay down debt etc.

 

Additionally, with one of your largest holdings you would think that you would want them to maximize the cash usage through their own repurchase of shares/invest in the business decisions.

 

 

 

[Parsad]

This was what I was getting at A-Hamilton. The issuance of a dividend was an obvious hint that capital allocation might not be all that great. It seems to me that if they lower buybacks now, that would only reinforce my thoughts on capital allocation at Dell. Why issue dividends now with the business priced at 4-5xFCF and the need to get acquisitions at reasonable prices to increase market share and moat when the opportunity arises?

 

Thank you for your input PlanMaestro, I appreciate it.

Tombgrt,

I don't know if you are a shareholder or not, but for what its worth I about jumped thru the phone at DELL IR the day of the announcement. I'm sure Longleaf was just in pure shock.

 

I'm not and haven't been so far. That might change in the future. I'm sure they were in shock, just like Prem Watsa probably was. I just don't see how this can ever be a good move. Maybe someone can explain the rationale to me.

 

I believe the company is quantitatively cheap but generally I look for certain qualitative elements. Great management is a plus and capital allocation is just one of the factors. I absolutely love owner-operator companies but they make mistakes too. Just look at DWA and what happened there with all the buy backs, total waste imo..

 

The dividend was done to emphasize the fact that they felt that cash flows going forward would grow.  It wasn't the best use of the capital, but it reinforces their belief that this is a mature business, with regular, growing cash flows. 

 

They can still issue the dividend and buy back lots of shares.  The dividend isn't going to stop their ability to do that, as they have a ton of liquidity and a ton of free cash coming in every quarter.  Cheers! 

[ERICOPOLY]

 

and so the dividend has an impact on taxes Dell pays today and whether it acquires companies with foreign or domestic cash.

 

And that is 100% the same issue as with the buybacks.

 

So that noise just filters out and we are exactly as I described it.

 

X equals X.

 

 

[Parsad]

 

and so the dividend has an impact on taxes Dell pays today and whether it acquires companies with foreign or domestic cash.

 

And that is 100% the same issue as with the buybacks.

 

So that noise just filters out and we are exactly as I described it.

 

X equals X.

 

This sucker is getting damn cheap!  Crazy.  Cheers!

[SI]

I don't think they were in shock. A few years ago, Dell brought in a head of Corp Dev from IBM(which IBM fought tooth and nail). His opportunity - our cash pile is huge(I think at the time was $6/share) and we don't compete against anyone in IT svcs so from a clean sheet of paper go get us the footprint as cheap as you can that you would have installed at IBM if you didn't have to worry about disrupting the existing IBM cash flow streams/ partner relationships.

 

Today that pile of cash on a net basis is $3.50 but as was alluded to above it has helped out tremendously on the sustainability of the future cash flow stream as PCs took a nose dive. DB estimates that "Growth Dell" is now doing $1/share in EPS. While the cash flow profile of the new business isn't as good(what else but AMZN is?), they can keep feeding the beast of creating a middle market IBM. Any big wig at Big Blue as well as Michael and even Longleaf probably all saw that paying a dividend in this market had such a large impact on lowering your cost of capital that at a 13% payout ratio(ML has a $2.50 in FCF number for next year) that they could afford to do it b/c the opportunity to fill in the rest of the paper remains compelling and their EV/FCF is 26%.

[Viking]

DELL has been on my watch list for a while. FFH, Southeastern own it and Markel recently bought a little.

 

On the flip side, here is what David Einhorn recently had to say "Dell (DELL) proved to be a disappointment. We had thought that the growth in the non-PC business would be enough to offset the deterioration in the PC business. The non-PC growth was smaller than we'd hoped and the PC deterioration was worse than we'd anticipated. While DELL has a good balance sheet, it appears likely that management will try to use much of the cash to try to buy its way into better businesses. At a minimum, this will erode some of the value cushion that the cash balance creates. We exited with a loss."

[Parsad]

I don't worry about what Einhorn or anyone else says...so it's a non-starter.  How much money would I have lost over the years...let's rephrase that...how much would I have not made, if I had listened to everyone telling me how wrong I am about my analysis.  DELL is our third largest holding after today!  Cheers!

[Rabbitisrich]

Any big wig at Big Blue as well as Michael and even Longleaf probably all saw that paying a dividend in this market had such a large impact on lowering your cost of capital that at a 13% payout ratio(ML has a $2.50 in FCF number for next year) that they could afford to do it b/c the opportunity to fill in the rest of the paper remains compelling and their EV/FCF is 26%.

 

If the dividend doesn't reduce bond yields, and the marginal ROC is shrinking, then Dell would want the cost of equity to be as high as possible. What is the benefit of a cash flowing business with a high equity yield paying a dividend except to the extent that it hedges against investor mistakes?

[SI]

Depending on how you solve for the discount rate - those paying dividends have seen a beta in this market well below the average company. Dell is new to having an income stream attached with it so to say that the impact hasn't been picked up yet I think is a rushed conclusion.

[T-bone1]

With respect to Sanjeev, I think there absolultely is such a thing as a value trap, although I agree with him that many managers simply refer to things they have overpaid for as value traps.

 

My definition of a value trap is a company trading at a large discount to intrinsic value, where the intrinsic value is falling faster than the discount can be closed (by liquidating, buying back stock etc.)  Berkshire Hathaway would have been a value trap if Buffett hadn't taken control and reallocated the capital.  I don't think that my "definition" is much different than what Sanjeev said, but I think it is important in looking at the business.

 

Do people think that Dell's intrinsic value is falling? 

 

Looking just at the PC business, until this year, cashflow has been rising over the last few years.  Revenue has been falling as they "trim" non-profitable business, but cashflow has been reasonably steady.  Obviously cashflow from the PC business is going to be lower this year, but these things are lumpy.

 

Looking at the overall business, is cashflow going to be falling going forward?  are they destroying capital? 

 

Obviously the high-priced buybacks of the past don't look so good in hindsight, and the intrinsic value of the legacy business has fallen, but I think that is leveling out.  The consumer PC business has gone to zero basically, while the enterprise business is as strong as ever.

 

More recently, I don't hear a lot of people saying they are overpaying for acquisitions or buybacks.  They have spent about $4 billion in the last three years buying back stock for ~$15 per share.  They paid 20 times earnings for a rapidly growing Quest Software, whose growth should accelerate as part of Dell.  I think the other 6-7 large acquisitions have been at reasonable prices and done quite well.

 

If you look at the enterprise desktop business, Dell's relationships are clearly sticky, but this business is/has been commoditized.  Maybe it's only worth 4-5 times cashflow like Seagate or some other dying hardware business.  The services business is growing, even stickier, and isn't becoming obsolete.  Like IBM that business is probably worth 8 times cashflow.

 

Looking at the two together, the intrinsic value should be growing even if overall cashflow is declining for the next two years.  Buybacks should increase the intrinsic value at these levels.  I don't think anyone focuses on the fact that Dell's sticky relationships on the "client" or PC/server side should provide them with a big advantage on the Services/Solutions rollout.  These aren't two seperate businesses, but rather complimentary ones.

 

Similarly to how Steve Jobs new ipod business strengthened their consumer computer business, Dell's services business will make their enterprise PC business more sticky, and vice versa.  Neither of these businesses are dissapearing, and one is growing at a good clip.

 

I think that Einhorn probably realized this year would be crappy so he bailed.  He has access to all of the research, channel checks etc, and probably got the jump on this in the short term.

 

There is a big difference between "dead money" and a value trap.  This stock is "dead money" right now in the sense that it is very cheap but earnings, revenues, etc. will not be showing an appreciable improvement for at least 12 months.  This doesn't make it a value trap and is probably a very attractive time to buy.  By the time there is any visibility into improvements in the bottom line, the stock will have already gone up.

 

This stock trades for 6.25 times earnings even before adjusting for the net cash.  They have a strong franchise, are buying back stock, pay a ~3% yield, and even at lowered estimates the earnings are expected to rise for the next two years.  I think whatever downside exists is clearly priced in, and none of the upside is. 

[ERICOPOLY]

What is the benefit of a cash flowing business with a high equity yield paying a dividend except to the extent that it hedges against investor mistakes?

 

Take somebody who works for a living.  Let's say their employer tells them one day that there won't be a regular paycheck anymore, and instead they are told that there will be "special paychecks" every once in a while, but that the next one could be years away.  The employee is reassured that the special future paychecks will be significantly more valuable in real dollar terms.  Importantly, the employer is retaining those paychecks and investing them in publicly traded securities.

 

The employee is like... "well why don't you just give me the cash so that I can buy bread at the store, or alternately I can just invest it in those exact same publicly traded securities?"

 

Unfortunately the investor population at large hasn't realized that they could just sell an offsetting number of shares in order to generate a lower-taxed dividend, so instead we have to accomodate them and pay some sort of regular dividend.

[MVP444300]

Unfortunately the investor population at large hasn't realized that they could just sell an offsetting number of shares in order to generate a lower-taxed dividend, so instead we have to accomodate them and pay some sort of regular dividend.

 

If the general population is anything like me I have a hard time selling stock.  Its easy for me to buy but very difficult to sale; especially those companies that have good moat behind it even when I know the company is selling tremendously above intrinsic value. 

 

Also, IMO there are times when buybacks are not a good idea when the stock is trading higher than IV. 

[ERICOPOLY]

Unfortunately the investor population at large hasn't realized that they could just sell an offsetting number of shares in order to generate a lower-taxed dividend, so instead we have to accomodate them and pay some sort of regular dividend.

 

If the general population is anything like me I have a hard time selling stock.  Its easy for me to buy but very difficult to sale; especially those companies that have good moat behind it even when I know the company is selling tremendously above intrinsic value. 

 

Also, IMO there are times when buybacks are not a good idea when the stock is trading higher than IV.

 

I wouldn't be complaining too hard if management paid me more than IV for my shares.  It would work to my benefit.  Really there are far worse things, like for example expensive acquisitions where I can't find anything positive to my benefit.

[Rabbitisrich]

 

 

The employee is like... "well why don't you just give me the cash so that I can buy bread at the store, or alternately I can just invest it in those exact same publicly traded securities?"

 

Unfortunately the investor population at large hasn't realized that they could just sell an offsetting number of shares in order to generate a lower-taxed dividend, so instead we have to accomodate them and pay some sort of regular dividend.

 

It would be better for investors to set up some sort of mandatory tender facility, where investors are compelled submit stock pro rata to some pre-set aggregrate $ amount. The company would then immediately effect a stock split, so that each investor holds the same number of shares as before. You get a "dividend", but only pay tax on the gain. 

 

 

[ERICOPOLY]

 

 

The employee is like... "well why don't you just give me the cash so that I can buy bread at the store, or alternately I can just invest it in those exact same publicly traded securities?"

 

Unfortunately the investor population at large hasn't realized that they could just sell an offsetting number of shares in order to generate a lower-taxed dividend, so instead we have to accomodate them and pay some sort of regular dividend.

 

It would be better for investors to set up some sort of mandatory tender facility, where investors are compelled submit stock pro rata to some pre-set aggregrate $ amount. The company would then immediately effect a stock split, so that each investor holds the same number of shares as before. You get a "dividend", but only pay tax on the gain.

 

I like the sound of that.

 

There would be cases where you could be taking a tax loss along with your dividend!  This would be the case where you are tendering your shares below your cost basis.

 

[Myth465]

Where is Bronco, I remember you guys would have this discussion every few months...

Hopefully he comes back one of these days.

[ERICOPOLY]

You can sum the non-GAAP earnings since DELL stock bottomed in Q1 2009, discount them by 50%, add them to the 2009 stock low, and that's about where the price of the stock is today. 

 

I bought some today/yesterday on the basis that it's really cheap relative to non-GAAP earnings, balance sheet is strong, management is good, it looks to be growing, they return enough to shareholders to meet my cash needs while I wait, and it seems to trade at least as high as $16 every year, including this year where it was briefly above $18.

 

[T-bone1]

You can sum the non-GAAP earnings since DELL stock bottomed in Q1 2009, discount them by 50%, add them to the 2009 stock low, and that's about where the price of the stock is today. 

 

I bought some today/yesterday on the basis that it's really cheap relative to non-GAAP earnings, balance sheet is strong, management is good, it looks to be growing, they return enough to shareholders to meet my cash needs while I wait, and it seems to trade at least as high as $16 every year, including this year where it was briefly above $18.

 

Very well put

[ERICOPOLY]

The worries over whether or not Apple will replace Dell in corporate notebooks is really not my worry.

 

My worry is whether Microsoft itself will replace Dell.

 

The Microsoft Surface tablet is what I would purchase myself, and it's what I would choose if I were an IT guy rolling out Windows 8 tablets in a corporation.

 

I don't want all that crap that DELL loads on top of Windows.  It all detracts from the reliability and performance of the system.  For corporations it just means more software to support and more reliability complaints.

 

 

[DCG]

Michael Dell has been aggressively buying back and made a huge buy himself a couple of years ago at similar prices.

 

He actually spent huge amounts of money buying back stock at well over $20 a share, including several hundred million of his own money.

 

I hate this company and think they make crappy products, but that said, I do think the stock is quite cheap at just over $10 a share. I don't think they're going to go out of business, and selling for less than twice their cash, the market is starting to act like that's the case.

[PlanMaestro]

I was referring to the most recent one.

 

 

P 2011-03-18 2011-03-18 16:45:17 DELL INC DELL DELL MICHAEL S CEO 3,287,000 $14.42 $4.73936E7 2.4335E8 2.02% view

P 2011-03-17 2011-03-18 16:45:17 DELL INC DELL DELL MICHAEL S CEO 2,150,000 $14.21 $3.05573E7 2.40063008E8 4.98% view

P 2011-03-16 2011-03-18 16:45:17 DELL INC DELL DELL MICHAEL S CEO 5,000,000 $14.41 $7.2071E7 2.37912992E8 3.51% view

 

 

P 2008-09-05 2008-09-08 16:04:08 DELL INC DELL DELL MICHAEL

S CEO 1,378,000 $20.67 $2.84839E7 2.25543008E8 -26.22% view

P 2008-09-04 2008-09-08 16:04:08 DELL INC DELL DELL MICHAEL

S CEO 3,500,000 $20.42 $7.1474896E7 2.24164992E8 -25.32% view

P 2008-07-01 2008-07-01 16:18:47 DELL INC DELL DELL MICHAEL S CEO 2,173,600 $21.89 $4.75805E7 2.20664992E8 11.51% view

P 2008-06-30 2008-07-01 16:18:47 DELL INC DELL DELL MICHAEL S CEO 100,000 $21.94 $2,194,000.00 2.18491008E8 9.39% view

P 2008-06-27 2008-07-01 16:18:47 DELL INC DELL DELL MICHAEL S CEO 2,230,000 $22.39 $4.99371E7 2.18391008E8 4.81% view

 

 

He also had a big sale above $40, so he is not stupid. In the early 2000s there are several other sales well above $30, so he is essentially recovering those shares he sold at a greater than 50% discount.

 

 

S 2004-11-18 2004-11-19 16:27:23 DELL INC DELL DELL MICHAEL S

director 1,000,000 $40.23 $4.02349E7 2.64491E7 -2.97% view

S 2004-11-18 2004-11-19 16:27:23 DELL INC DELL DELL MICHAEL S director 3,275,000 $40.29 $1.31947E8 2.07888992E8 -2.83% view

S 2004-11-17 2004-11-19 16:27:23 DELL INC DELL DELL MICHAEL S director 6,725,000 $40.42 $2.71833984E8 2.11164E8 -2.50% view

 

 

 

[T-bone1]

I'm not sure of any reason it isn't worth $20.  I've never seen a valuation from those who dislike the stock, instead they say it will go out of business.  It reminds me of when I was (painfully for a good while) short netflix and the bulls would only point to growth numbers rather than ever say what the company is worth.  The problems with Dell are well known, but in order for Michael Dell's purchases (and the buy backs) in the high teens to turn out badly, the Enterprise PC business will have to literally disappear over the next three -five years.  Is anyone realistically arguing that?

 

I haven't bought yet, but I am admittedly market timing by waiting.  I think it is definately a good buy here.

[alpha231616967560]

Looks interesting, but I am not seeing any moat without some significant growth in their data center business. For me, this is a classic "I can't see where the business will be in 10 years" sort of situation. Appears cheap, but is it a value trap? Hard (for me, anyhow) to tell...