Dell Technologies Is Attracting Value Investors With Its 3.5% Yield and 5.5x P/E

Dell Technologies (DELL) started paying a quarterly dividend 2 quarters ago and yesterday it just announced another 33-cent dividend. This gives DELL tech stock a healthy 3.5% dividend yield since its annual dividend works out to $1.32 and the stock sells for $37.70 as of Sept. 7. 

This makes it one of the highest-yield tech stocks, helping to attract value investors.

In addition, DELL stock is very cheap trading at just 5.5 times earnings projected to reach $6.80 for the year ending Jan. 2023. Seeking Alpha produces this average earnings per share (EPS) estimate based on its survey of 19 analysts. In addition, 18 analysts project $7.07 in EPS for the year to Jan. 2024, putting the stock on a forward 5.3x multiple.

This is a very cheap valuation and draws value investors toward the stock. In the last month alone it has fallen over 17.5%, putting it squarely in value territory.

Cash Flow Positive and Buying Back Shares

In Nov. 2021, Dell Technologies spun off VMware (WMW) which now trades under a separate stock listing with the VMW ticker. On Aug. 25, the company reported its fiscal Q2 2023 results (ending July 29) showing that it made non-GAAP diluted earnings per share of $1.68.

Moreover, the company also was able to eke out $700 million in cash flow from operations and $300 million in positive free cash flow (FCF) on an adjusted basis, not including VMware. This is based on page 21 of its slide deck presentation. More importantly, the company says it expects to produce strong free cash flow going forward.

To underscore that goal, Dell now says that it will return 40% to 60% of adjusted FCF to shareholders through buybacks and dividends.

That is why it started buying back large amounts of its stock during its fiscal Q2 (ending July 29). It paid $608 million for 13.6 million shares (an average price of $44.71). Its 33-cent quarterly dividend cost $242 million, so its total shareholder return payments totaled $850 million.

Where This Leaves Investors In DELL Stock

Let's think about that. Assuming $850 million in payments reflects 60% of its expected annual adj. free cash flow, we can forecast FCF will reach $5.66 billion (i.e., ($850m x 4)/0.60 = $5.66b). At 40%, it implies adj. FCF of $8.0 billion. On average it shows that Dell expects $6.4 billion.

This represents a huge FCF yield of 23.1% since DELL stock has a market cap of $27.7 billion (i.e., $6.4b/$27.7b=0.23). Typically, high-tech stocks will have a 3% to 5% FCF yield. This implies that DELL stock has a huge upside. It could easily double or triple just to get back to normal valuation levels.

This is why value investors are attracted to Dell Technologies now.

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