EMC Corporation (NYSE: EMC) is one of the giant technology behemoths out there that has been criticized for quite some time for holding all of its cash for acquisitions and to keep its balance sheet solid. Now that it has a market cap north of $50 billion, EMC probably doesn’t have to worry so much about the old rumors that Cisco Systems Inc. (NASDAQ: CSCO) was going to buy the company. International Business Machines (NYSE: IBM) has also historically been considered a buyer, but nothing has surfaced and it seems that the time for that has come and gone.
When companies get above $50 billion in market cap they are generally considered to be off-limits for a buyout. The thought is that the raw size is just too big get funding for or s too dilutive to a larger acquirer. EMC is trading about 3% higher at $27.50 and shares hit a new 52-week high of $27.59 today after the storage giant’s 28% earnings growth and after it reiterated its 2011 earnings guidance. CEO Joe Tucci did throw some uncertainty caveats like Japan, rising commodity prices (particularly oil) and public sector deficits (austerity measures).
EMC is getting closer and closer to paying a dividend. If a slow-moving Cisco Systems Inc. (NASDAQ: CSCO) has started its dividend plans, then a company like EMC cannot be too far behind. Tucci said that the company is considering all uses of cash to enhance shareholder value, including a potential dividend, but for now cash is being utilized for share buybacks and for acquisitions. Cash from operations was about $1.1 billion in the last quarter and sees net cash generated of more than $5 billion in 2011 and about $4 billion in free cash flow for the year. EMC said specifically that it plans to use about $1.5 billion for stock buybacks in 2011.
Buybacks are an alternative to dividends. We generally don’t care about buybacks as much, but they are a historic tool used by corporate boards meant to drive shareholder returns. EMC still holds this super-majority stake in VMware, Inc. (NYSE: VMW) as well. Due to the high-growth of VMware, you should not be looking for a virtualization dividend any time soon out of VMware.
Our take is that as EMC’s stock has hit a new year high that investors are going to want more to drive shares. EMC has not paid a dividend and seems at least a bit more willing than it has in the past. The company can also use its VMware shares for a spin-off if it ever chooses to. The company’s annual report stated, “We have never paid cash dividends on our common stock. While subject to periodic review, the current policy of our Board of Directors is to retain cash and investments primarily to provide funds for our future growth. Additionally, we use cash to repurchase our common stock.”
EMC has several options ahead for shareholders. Our bet is that EMC will live up to its share buyback plan first. Second, it is likely to start a cash dividend (or admit that it is at least ready to start a dividend) of close to what Cisco started with a 1.5% annualized yield or thereabouts. For now, it seems that VMware is going to be locked up inside the EMC balance sheet as it has massive growth.
JON C. OGG
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