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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By | 2014-09-09T11:24:23+00:00 September 6th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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