Dell's $5 Billion Authorization Should be Used to Support EPS: Analyst

Dell Inc. says its board of directors authorized an additional $5 billion for stock repurchases, which Barclays Capital predicted whould be used to support Dell's earnings per share but not necessarily be a catalyst.

Dell's board authorized an additional $5 billion for stock repurchases in addition to the $2.2 billion remaining from its previous authorization at the end of the fiscal second quarter. The company currently has more than $16.2 billion in gross cash on its balance sheet.

In the most recent quarter, Dell repurchased $1.1 billion worth of stock -- after repurchasing $450 million in the first quarter. Given the recent announcement, it seems there is upside to the company’s previous goal to repurchase more than $2 billion in stock for all of fiscal 2012.

Based on Dell’s closing price on Tuesday of $14.38, the $5 billion represents about 350 million shares. In December 2007, Dell announced a $10 billion share authorization and then repurchased about $7 billion worth of stock in the ensuing four quarters (Dell’s share price fell 58 percent in 2008 versus the S&P 500 which fell 38 percent).

Given secular concerns, it is hard to argue that buybacks serve as a positive long-term catalyst in the PC sector (some other PC-related players in the space have increased repurchase authorizations of late as well, only to see share prices fall soon thereafter), Barclays Capital said.

Rather, we believe Dell will use buybacks as a major lever to manage EPS through next fiscal year as revenues remain challenged, operating expenses rises and gross margins are arguably nearing or at a peak, said Ben Reitzes, an analyst at Barclays Capital.

Our checks continue to suggest a slowing demand environment coupled with a mature point in the corporate refresh cycle, he said.

On the positive side, Dell should benefit from any potential disruptions at major competitors and its mix shift toward higher margins businesses and services seems to be creating greater consistency of results, he said.

Reitzes said he quantified the potential impact to fiscal 2013 earnings based on Dell's potential for share repurchases. For every 100 million reduction in average share count beyond current expectations, the company could potentially see a $0.10 to $0.15 per share benefit to earnings.

Based on past practices around buyback pace and making some assumptions around the impact on average share count (not ending share count), he believes an accelerated pace of repurchases could add about a 20-cent per share cushion to earnings next year.

However, this 20-cent per share cushion may be needed to merely support earnings at current consensus levels given potential for revenue shortfalls and margin deterioration, he said.

We generally do not believe that buybacks will expand multiples for companies in the PC space. We continue to believe Dell may seek additional acquisitions for services and software assets as it attempts to build out its enterprise portfolio, said Reitzes.

The brokerage maintained its equal weight rating on shares of Dell with a price target of $16. It maintained its fiscal 2012 adjusted earnings of $2.00 on revenue of $62.4 billion, its 2013 estimate of $1.80 on revenue of $63.4 billion and its 2014 estimate of $1.80 on revenue of $64.3 billion.

Dell stock closed Wednesday's regular trading up 3.34 percent at $14.86 on the NASDAQ Stock Market, while in the after-hours the stock further rose 0.61 percent.