Dell Can Reach $19 With Sentiment Boost From Dividend & Cost Cutting Plans

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In a bid to address its falling share price and boost shareholder confidence Dell (NASDAQ:DELL) announced its first dividend as well as a cost reduction program spanning three years where it plans to save about $2 billion. The dividend will be paid quarterly and will be financed from its cash flows. Dell has announced that it will pay a quarterly dividend of 8 cents a share beginning its fiscal third quarter. We expect this to divert cash away from acquisitions as Dell transforms its business to move away from computer hardware sales to high margin businesses like data storage, network security and networking and thin client technologies.

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Cost Cutting Program To Drive Profitability In The Short Run

It has announced that it will cut costs to the tune of $2 billion over the next few years. Its plans are to save ~$600 million by streamlining its manufacturing operations and simplifying its product lines while $800 million in savings are expected through consolidating sales support and marketing while $400 million in expenses are expected to reduce by standardizing its service operations. The company plans on $200 million in cost reduction will come from consolidating and streamlining its IT systems used in internal operations. [1]

Ultrabooks To Improve Hardware Sales

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At the Ultrabook’s launch experienced 3x expected demand which is likely to have lowered as rivals have launched similar products in the market, but the product is still in demand and may revive the PC market whose margins are low. If the ultra-book helps increase notebook market share to 15 percent, we can expect an upside of ~10 percent from our current Trefis price estimate.

If margins improve slightly to 27 percent by the end of our forecast period, we can expect a ~15 percent upside in the current Trefis price estimate.

Windows 8 Tablets May Drive Growth

The Windows 8 Tablet is a much awaited product and its second attempt at capturing tablet market share. We expect Windows 8 to do better than its “Streak” range of tablets as Dell will leverage on existing institutional customers, educational institutions and government contracts to sell its tablet range. Currently mobile devices and tablets constitute a combined ~1 percent of our current price estimate and we expect to see significant growth here if the Windows 8 tablet is successful.

We currently have a $19.22 Trefis Price Estimate for Dell which is significantly higher than current price estimates.

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  1. Dell Dividend Boosts Shares as CEO Looks Beyond PC Era,, June 14, 2012 []