Dell Inc., which initiated its first dividend yesterday, will use acquisitions to add products for corporate customers and curb reliance on personal computers, a business battered by competition from smartphones and tablets.
The world’s third-largest PC maker plans to boost revenue from data-center products and technology services 45 percent to $27.5 billion by fiscal 2016, Dell said at a meeting with analysts today in Austin, Texas. Over that four-year period, PC-related revenue will climb 8.3 percent to $47 billion.
Dell’s 8-cent-a-share quarterly dividend may help retain current shareholders and lure institutional investors as the company works to revive sales. Chief Executive Officer Michael Dell has been acquiring makers of data storage, networking equipment and business software to diversify beyond PCs and will continue to use deals to boost revenue.
“The new dividend will keep investors satisfied during this transition period,” said Brian White, an analyst at Topeka Capital Markets in New York, in a research report today. He upgraded Dell to buy from hold and raised his price estimate to $15.75 from $13.50. “Dell’s strategy in the enterprise market is moving toward greater focus.”
The shares rose 3.8 percent to $12.42 at 2:03 p.m. in New York. The stock had dropped 18 percent this year through yesterday.
“We’ve had some nice acquisitions which are off to a good start,” CEO Dell said. “We have a modest software business and that’s an area where we can grow rapidly.”
The company has acquired software vendors including data-backup maker AppAssure and network-security company SonicWall Inc. this year. Terms of the purchases weren’t disclosed.
Dell will focus on data-center gear as well as computing software and services while seeking to cut costs by more than $2 billion over the next three years, the company said. Costs can be trimmed from the supply chain and sales support.
“As you think about our industry it’s constantly in transition,” Dell said at the meeting. “We’re focusing on a couple of key areas.”
PC sales, while tepid, still help boost sales of software, accessories and services. President Jeff Clarke said there’s $3.5 billion of new sales opportunity in tablets, accessories and desktop virtualization software by fiscal 2013.
Tablets running Microsoft Corp.’s Windows 8 operating system may add $1 billion in sales over the next four years. Dell’s sales projection for the PC and device business assumes no growth in traditional desktops and laptops the next four years, Clarke said.
The dividend declaration came after past board proposals to return more cash to shareholders. A shareholder proposal for a dividend was defeated at the company’s annual meeting last July.
“It’s been something investors have asked about for years now,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. “The reaction will be positive.”
Dell may generate $2.25 a share in free cash flow this year, or about 19 percent of its market value, according to Noland, who has a neutral rating on the shares.
“You don’t typically see companies with free cash flow yields that high, and when you do, investors are saying, ‘We don’t think we’re ever going to see this free cash,’ ” he said.
The company ended the fiscal first quarter with $17.2 billion in cash and investments, Chief Financial Officer Brian Gladden said on a conference call last month.
Dell follows other large technology companies in starting or increasing dividends after amassing cash previously earmarked for research, development and acquisitions.
Apple, the world’s largest company by market value, in March said it would pay its first dividend in 17 years, heeding investors who urged it to return part of its cash hoard. Microsoft, the biggest software maker, in 2003 acceded to shareholders’ demands for a cash return by paying its first dividend. It raised the payout by 25 percent last year.
Through the dividend and stock buybacks, Dell said it plans to return 20 percent to 35 percent of free cash flow to investors, up from a prior projection of 10 percent to 30 percent. Over the past four quarters, Dell has generated $4.9 billion in cash flow from operations, the company said.
The board has periodically considered paying a dividend, and the company plans to continue its share repurchase program, said David Frink, a Dell spokesman.
As smartphones and tablets siphon sales from PC makers, Dell’s sales growth has slowed, with revenue rising just 1 percent in fiscal 2012. The company lost share in the global PC market in the first three months of the year, and it now trails Hewlett-Packard Co. and Lenovo, according to market researcher Gartner Inc. Dell is expanding in enterprise technology to offer corporations a broader lineup of products and services to run technology operations.
Dell’s dividend yield is 2.7 percent, according to data compiled by Bloomberg. Hewlett-Packard’s yield is 2.4 percent, while Lenovo’s is 1.9 percent.
In February, Dell projected fiscal 2013 earnings excluding some items of at least $2.13 a share. The company in May said revenue for the quarter ending in July would be $14.7 billion to $15 billion.