/Dell%20Technologies%20by%20Poetra_RH%20via%20Shutterstock.jpg)
Dell Technologies (DELL) announced an 18% hike in its annual dividend on Feb. 27 and a massive $10 billion additional share buyback program. Value investors are interested in this as it shows DELL stock could be deeply undervalued here.
For example, based on its historical yield. DELL could be worth significantly more. I discussed this in a Feb. 10 Barchart article, “Dell Could Hike Its Dividend Soon - Is It Worth Buying Now?”
Dell stock closed at $102.75 on Friday, Feb. 28, down near its low point of $100.09 on Feb. 3. This article will discuss what the stock could be worth based on the company's recent announcement.
Dell's 18% Dividend Hike Despite Lower Free Cash Flow
Dell Technologies' Q4 revenue rose 7.2% year over year (YoY), and it gained 8% for 2024. Much of this growth came from its Infrastructure Solutions Group (ISG), which was driven by AI server demand. ISG revenue was up 22% in Q4 and 29% for the full year.
However, despite this revenue growth, Dell Technologies' operating cash flow and adjusted free cash flow, although positive, were significantly lower than last year. This can be seen in the table below.
It shows that the company's Q4 adj. FCF fell 53% from a year ago and was down 45% for the full year. Nevertheless, its adj. FCF margins were still positive, not negative. That means the company can afford to pay its dividend. More on this below.
Moreover, the company's presentation deck shows that on average over the past 5 years, it has generated $4.5 billion annually in adj. FCF.
That implies that this could be a cyclical issue for Dell. Much of the company's expected growth is expected to come from its ISG division which among other things sells servers to AI data centers.
For example, that division generated $2.05 billion of the company's $2.159 billion in operating income for 2024. It likely also accounts for much of the company's adj. FCF of $3.1 billion.
As a result, based on this growth and the expectation of higher FCF margins, the board hiked its annual dividend by 18% to $2.10 per share, up from $1.78.
Note that this dividend only cost Dell Technologies just $1.275 billion, less than half of its $3.1 billion adj. FCF in 2024. With 700.5 million shares outstanding, the new DPS rate of $2.10 will cost Dell Technologies just $1.471 billion.
That is only 15.3% more than last year's costs. The difference between that projected cost and the announced 18% DPS hike is due to the company's massive share buybacks. For example, last year Dell spent $2.588 billion on share buybacks.
With its announcement of an additional $10 billion in buybacks, Dell's board must believe that the company's FCF will grow quite strongly. For example, if it were to spend this amount over 3 years, the cost along with a $1.47 billion annual dividend cost implies FCF of:
$3.33 billion buybacks annually + $1.47 b dividends cost = $4.8 billion in adj. FCF
That implies an average increase of 55% over the $3.1 billion it generated this past year. As a result, DELL stock could be worth much more.
Target Price for DELL Stock
With Dell's new DPS rate of $2.10, its annual yield is now over 2.0%:
$2.10 / $102.76 price = 0.020435 = 2.0435% dividend yield
However, over the past four years, Dell stock has traded with an average dividend yield of 1.33%, according to Seeking Alpha. Moreover, Morningstar's dividend yield history for DELL stock shows that its average yield since 2022, when it started paying dividends, has been 1.94%.
So, taking the average of these two metrics, implies that DELL could eventually trade with a yield of 1.635%. Just to be conservative, let's forecast a target price using a higher yield of 1.80%:
$2.10 DPS rate / 0.0180 = $116.67 per share
That implies that DELL stock could be worth +13.6% more:
$116.67 / $102.75 price today -1 = 1.1355 = +13.6% upside
This is based on an “average” yield. For example, if DELL stock were to trade with a lower yield of 1.33%, based on the Seeking Alpha calculation, it could be worth much more:
$2.10 / 0.0133 = $157.89
$159.89 / $102.75 = 1.556 -1 = +55.6% upside
So, based on these two metrics, there is a good possibility that DELL stock could eventually be worth between $116.67 and $157.89, or $137.28 on average.
Analysts Agree DELL Looks Undervalued
For example, analysts surveyed by Yahoo! Finance show that 24 analysts have an average price target of $142.27, implying an upside of 38.4% from here. Similarly, Barchart's survey shows a mean target price of $146.57.
AnaChart.com, which tracks analysts who have written recently on a stock as well as their performance, shows that 22 analysts now have an average price target of $125.75. That implies an upside of 16.6% from Friday's price.
So, based on its strong free cash flow, the dividend hike, the buyback raise, its average dividend yield, as well as analysts' price targets, Dell stock looks undervalued.
One way to play this is to sell short out-of-the-money (OTM) put options. That way an investor can generate extra income while setting a lower potential buy-in price target.
Shorting OTM Puts
For example, look at the March 28 expiration period, 3 weeks from now. It shows that the $100 strike price put option, 2.69% below today's price, has a midpoint premium of $3.83 per put contract.
That means that any investor who sells short this put contract can make an immediate yield of 3.83% (i.e., $3.83/$100.00 = 0.0383) over the next 3 weeks.
For example, by securing $10,000 in cash or buying power with a brokerage firm, the investor can enter an order to “Sell to Open” 1 put contract at $100.00. The $10,000 acts as collateral to buy 100 shares at $100 in case DELL falls to $100 on or before March 28.
Nevertheless, even if that happens, the investor's breakeven investment entry point is $100 - $3.83, or $96.17. That is 6.4% below today's price, so it is a good way to set a buy-in price target.
Moreover, consider this. The investor would have a much higher dividend yield:
$2.10 / $96.17 = 0.021836 = 2.184%
The point is that this is a good way to set a lower buy-in. That would be the case even if DELL stock causes an unrealized capital loss if it falls below the $100 exercise price of these put options.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
