Dell Could Hike Its Dividend Soon - Is It Worth Buying Now?

Dell Technologies (DELL) is expected to announce a dividend hike at the end of February, and its Q4 and full-year earnings release could make the stock worth buying now. This is especially true if its free cash flow (FCF) and FCF margins are strong.

DELL is trading at $110.68, up today, but it's well off its recent peak of $138.92 on Nov. 21.

I recently wrote about Dell stock and argued that if its FCF margins are higher than 3.50% in 2024, the stock could rise: “Dell Technologies Stock Is Faltering - Time to Buy?” (Jan. 29).

Since then, the stock is up from $108.19. If the company decides to raise its dividend, now that it has made four quarterly payments at the same rate, this could act as a catalyst.

DELL stock - last 3 months - Barchart - Feb. 10, 2025

Dividend Hike Possible

Last year, on Feb. 29, 2024, Dell Technologies announced a 20% increase in its dividend in its annual earnings release. The company said it was a “testament to our ability to generate strong cash flow.”

Dell is now set to release earnings at the end of February, probably on Friday, Feb. 27. So far this year its free cash flow, for the nine months ending Nov. 1, has fallen 43%. Moreover, its FCF margin dropped from 6.95% last year (9 months) to 3.66% of sales, as I described in my Jan. 29 Barchart article.

So, why do I think Dell will hike its dividend?

First, I showed in the article that Dell is likely to generate at least $3.64 billion in free cash flow at a 3.50% FCF margin. It could come in much stronger than that, as the average for the 9 months was 3.66%.

That implies there is plenty of room to cover a dividend increase. For example, its present dividend costs less than half of this FCF:

   700.5 m shs o/s x $1.78 dividend per share (DPS) = $1.247 billion dividend cost

   $1.247b / $3.64b FCF = 0.343 = 34.3% of FCF

In other words, even if its FCF stays at a low 3.50% margin of sales, the company could easily afford to raise the dividend per share (DPS) by 10% to $1.96:

   $700.5m shs x $1.96 DPS = $1.373 billion dividend cost

   $1.373 b / $3.64b FCF = 0.377 = 37.7% of FCF

BuyBacks Possible

The point is that a 10% hike in its DPS would only cost 37.7% of its free cash flow. That leaves plenty of room for the company to continue its large share buybacks.

For example, in Q3 Dell bought back $454 million of its shares, or an annual rate of $1.82 billion. That leaves 

  $1.373b dividends + $1.82 b buybacks = $3.2 billion total shareholder returns

   $3.64b FCF estimate - $3.2 shareholder returns = excess of $0.44 billion

This shows that there is plenty of room for the company to do both a 10% dividend hike and to keep up its share repurchases at least at the level it had during Q3.

Price Targets for DELL Stock

Morningstar shows that the average dividend yield over the trailing 12 months (TTM) has been 1.67%. So, if the DPS is hiked 10% to $1.96, this implies DELL is worth over $117:

   $1.96 / 0.0167 = $117.37 per share

That is +6.0% higher than today's price of $110.68.

Moreover, analysts now have significantly higher price targets for DELL stock. For example, Yahoo! Finance reports that the average of 24 analysts is $151.14 per share. Similarly, Barchart's mean is $149.42.

In addition, AnaChart's survey of 18 analysts is $120.93 per share. That is still 9% higher than today.

One way to play this is to sell short out-of-the-money (OTM) put options. That way you can set a lower buy-in price target and still get paid while waiting to buy.

Shorting OTM Puts

For example, in my last article, I suggested shorting the $100 strike price puts for the Feb. 14 expiration period. The premium was $2.09 on the bid side, providing the short-seller an immediate yield of 2.09% for a 31-day-to-expiry (DTE) period.

Those are now close to worthless and trading for just 22 cents per contract. It seems unlikely that DELL will close at $100 on Feb. 14. The investor may want to roll those over by closing those at 22 cents (i.e., enter an order to “Buy to Close.”)

For example, look at the March 7 put option expiration period, 25 days to expiry (DTE). The $104 strike price puts trade with a high mid-price premium of $4.28.

That provides an immediate yield of 4.11% (i.e., $4.28/ $104.00) to a cash-secured short-seller of these puts over the next 3 weeks.

DELL puts expiring March 7 - Barchart - As of Feb. 10, 2025

This is a very high-yield play. It also has some risk. Note that the delta ratio is -0.32. That implies that there is a one-third or so chance that the stock could fall 5.92% to this level (i.e., it is out-of-the-money by this percentage), and the investor's account would be assigned to buy 100 shares at $104.00.

This means that the investor's $10,400 in cash that was secured to do this short-sale (i.e., 100 shares per put contract x $104.00) would be automatically debited and the account will receive 100 shares. 

But note that this means the investor, who has already received $428 (i.e., 100 shs per contract x $4.28 premium), would only have a net cost of $9,972 for the 100 shares (i.e., $99.72 per share). That is over 10.9% lower than today's price. 

Summary

In other words, this is a very profitable way of setting a lower buy-in target. Meanwhile, the investor makes an immediate yield of 4.11%. That is almost better than owning the shares long-term. 

For example, if the investor can repeat this trade 3 times over the next 3 months, the expected return is over 12.3%.

The bottom line is that DELL stock looks very attractive here, especially if the company announces a 10% or higher dividend hike. That could easily occur, as we have shown, if DELL achieves at least a 3.50% FCF margin for 2024.