Buyback Backlash

What’s happened to Dell?

From a business perspective, the answer is easy. They never really made the transition from making desktop computers to laptops, much less tablets. The business model built out of Michael Dell’s dorm room which consisted of assembling boxes with custom components didn’t keep up with the times. So the stock has fallen 80% from its high of $50 / share in March of 2000 to its current price of $10 per share today.

But what happened to all the money?

The stock is down to the level it had in 1997—essentially $10 / share. But in the intervening 15 years, the company earned over $15, without paying a dividend. So where did all that money go?

The answer is buybacks. As the stock price plummeted, the company bought back its shares at prices that were falling. Since 1997, the company has spent $39 billion buying its own stock. That’s incredible, considering that the company is now worth only $18 billion. Management has pulled off a “disappearing rabbit” trick with its own capital.

This shows the gamble that management makes when it buys back its own shares. If the company is growing and needs more capital, then buying back stock makes little sense: use the money you have to grow—don’t borrow from the market and pay all those Wall Street fees. But if the company is stagnant or shrinking—as Dell has been—then buying shares as their price declines is just a way to destroy value.

That’s why I like dividends. Buybacks reward shareholders who are leaving a company; dividends reward the owners who stick around. Everyone pays lip-service to long-term investors, but only dividends back up that appeal with cash.

Douglas R. Tengdin, CFA
Chief Investment Officer
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