Dell Technologies (Dell) is set to announce a dividend hike at the end of February, with fourth quarter and full-year earnings releases likely to be worth buying the stock now. This is especially true when free cash flow (FCF) and FCF margins are strong.
Dell is trading at $110.68 today, but its recent peak at $138.92 on November 21 is quite far apart.
I recently wrote about Dell stocks and argued that if the FCF margin is above 3.50% in 2024, “Dell Technologies Stock is declining – time to buy?” (January 29th).
Since then, the stock has risen from $108.19. If the company decides to raise its dividends, this could serve as a catalyst as it made four quarter payments at the same rate.
Possibility of payout hiking
Last year, on February 29, 2024, Dell Technologies announced a 20% increase in dividends in annual revenue releases. The company said it is “proof of its ability to generate strong cash flow.”
Dell is currently set to release revenues at the end of February, possibly at Friday, February 27th. So far, this year’s free cash flow has dropped 43% for the nine months ended November 1st. Furthermore, the FCF margin fell from 6.95% (9 months) last year to 3.66% of sales, as explained in the January 29th bar chart article.
So why do you think Dell will hike that 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. The nine-month average was 3.66%, which could be much stronger than that.
That means there is plenty of space to cover the increase in dividends. For example, the current dividend cost is less than half of this FCF.
700.5 m shs o/sx $1.78 per share per dividend (DPS) = $1.247 billion dividend cost
$1.247B/$3.64BB fcf=0.343=34.3% of FCF
In other words, even if the FCF remains at a low margin of sales of 3.50%, the company can still afford to increase its dividend per share (DPS) by 10%, at $1.96.
$700.5m shs x $1.96 dps = $1.373 billion dividend cost
$1.373b/$3.64b fcf=0.377=37.7% of FCF
Possible buybacks
The point is that a 10% increase in DPS costs only 37.7% of free cash flow. This leaves plenty of space for the company to continue its massive stock buybacks.
For example, in the third quarter, Dell bought back $454 million in stock or $1.82 billion per year. It’s going to go
Dividend of $1373 Million + $1.82 b Buyback = $3.2 billion of shareholder returns
36.4 billion FCF estimate – $3.2 Shareholder returns = Over $0.440 million
This shows that the company has enough space to do both 10% dividend hikes and continue its stock repurchase at the level it had at least in the third quarter.
Dell Stock Price Target
Morningstar shows an average dividend yield of 12 months (TTM) of 1.67%. So if your DPS is hiked to 10% and costs $1.96, this means Dell is worth more than $117.
$1.96/0.0167 = $117.37 per share
This is +6.0% higher than today’s $110.68 price.
Additionally, analysts now have significantly higher price targets for Dell stocks. For example, Yahoo! Finance reports that the average for the 24 analysts is $151.14 per share. Similarly, the average bar chart is $149.42.
Additionally, an Anachart survey of 18 analysts is $120.93 per share. That’s still 9% higher than today.
One way to play this is to sell a short money (OTM) Put option. This will allow you to set a lower buy-in price target and receive payments while waiting for your purchase.
OTM short pads
For example, my previous article suggested a reduced strike price of $100, which expires on February 14th. Premium offered an immediate yield of 2.09% on the bid side, offering a 2.09% immediate yield to sellers with a 31-day expansion (DTE) period.
These are currently unworthy and traded for just 22 cents per contract. It appears unlikely that Dell will close on February 14th for $100. Investors may want to roll over them by closing them at 22 cents (i.e. enter your order to “close”).
For example, use the March 7th option with an expiration date of 25 days (DTE). The $104 strike price is a high trade of mid-price premium of $4.28.
This will provide an immediate yield of 4.11% (i.e. $4.28/$104.00) for short sellers who posted cash on these puts over the next three weeks.
This is a very high yield play. There is also a certain amount of risk. Note that the delta ratio is -0.32. That means there is about a third of the chance that the stock could fall 5.92% to this level (i.e. money is off at this rate), and investors’ accounts have 100 shares You will be allocated to purchase $104.00.
This means that the investors’ $10,400 cash set aside for this short-term sale (100 shares per PUT contract x $104.00) will be automatically deducted and the account will receive 100 shares.
However, this means that investors who have already received $428 (i.e. 100 shs x 4.28 premium per contract) only have a net cost of $9,972 for 100 shares (i.e. 99.72 per share). Note that this means. This is over 10.9% above today’s price.
summary
In other words, this is a very profitable way to set a lower buy-in target. Meanwhile, investors will receive an immediate yield of 4.11%. This is almost better than holding stocks for the long term.
For example, if an investor can repeat this transaction three times over the next three months, the expected revenue will be above 12.3%.
The bottom row is that Dell stock looks very attractive here, especially when the company announces a dividend hike of 10% or more. This can easily happen if Dell achieved an FCF margin of at least 3.50% in 2024.
On publication date, Mark R. Hake, CFA, had no position (directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, see BarChart’s disclosure policy.
More news from the bar chart
This gold miner was tanked with heavy optional activities. Why is the market ignoring important details? Dell could potentially hike dividends right away – is it worth buying now? After Q4 results, a revenue report of 1/14 from February 10th – Time to buy pin stock?
