Dell Inc. (DELL) chalked out some strategies targeting a profit pool, going forward. Keeping in view of Dell's performances over the past few quarters, management's decision to cut cost aggressively is sure to give the fundamentals a boost. Recently, the world's third largest PC maker announced its intention to reduce organizational costs by roughly $2.0 billion over a period of 3 years. Specifically, Dell wants to save $800.0 million and $600.0 million in sales delivery and supply chain areas, respectively. The rest would come from restructuring service delivery and general and administrative heads. However, Dell did not mention any job cut. Notably, its rival Hewlett-Packard Co. (HPQ) recently announced a massive headcount reduction by around 27,000 in an attempt to optimize cost.

The basic idea of this cost reduction is entirely profit-oriented but the main focus will remain on a lateral shift from traditional computing business to a high-margin enterprise-class software and services market. The cost saved from the initiative will help fund further acquisitions targeting the higher-margin segment.

Though cost reduction is the prime focus, Dell is committed to return value to shareholders. Share repurchase was a constant program till now. But the company will now distribute a portion of profit by way of paying a dividend. The first quarterly dividend (since its inception) of 8 cents per share will cost Dell around $560.0 million.

There is no doubt about positive investor sentiment post the dividend announcement. But the problem lies elsewhere. Over the past few quarters, Dell's cash balance has fallen continuously. In the last quarter, Dell generated a cash balance of $13.7 billion, which was down from $14.8 billion in the prior quarter.

Apart from this, Dell's continuous acquisition spree and expenses on research and development will further reduce its cash balance. Also, there is uncertainty regarding the time when the synergies from the acquisitions will be felt.

Yesterday, the stock rose 2.6% following the dividend announcement on June 12. But concerns over Dell's ability to continue dividend payout and fears of losing PC market share to Asian manufacturers led to a bearish view for the short term.

Currently, Dell has a Zacks #4 Rank, which implies a short-term Sell rating.

 
To read this article on Zacks.com click here.
 
Zacks Investment Research
Filed Under: ,
Tickers in this Article: HPQ, DELL

comments powered by Disqus

Trading Center