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At the end of 2023 we added Dell Technologies to the fund. In today’s stock market, Dell is an unusual type of large company for at least two reasons. Firstly, while it is in the technology sector with market share leadership positions, it has been lowly valued since re-listing and pays a dividend yield just shy of 2%. Only 40% of the $5bn+ sized North American listed technology companies pay any dividend, and only 25% pay a yield above 1%[1]. Secondly, it has retained the same founder as owner and CEO, Michael Dell, since incorporation in 1984. Less well-known is that Dell also has two influential co-chief operating officers, one of which has been working very closely with Michael since 1987. Together, they have managed the many ups and downs of the technology industry, and in 2015 made a bold move by taking the company private to finance the largest technology acquisition in history, acquiring EMC for $67bn. Defying the odds of large-scale M&A typically destroying value, the company demonstrated its cash generative nature by paying down the associated debt and now, just at the right time, it finds itself re-listed with an expanded offering of products and services to ride any new wave of corporate IT investment. While many still associate the Dell brand with consumer facing computing equipment, its biggest earnings contributors are servers, storage and commercial computers. We believe the company is entering into a sweet spot, where increasing complexity plays right into the strengths of its combined offerings. These allow customers to fuse together different IT and cloud architectures, and in turn process data in a secure yet decentralised manner. There are many new possibilities, and Dell now thinks its Infrastructure Services Group division can grow 6-8% on average rather than 4-6% in the past[2]. Eighty percent of its research and development staff are software engineers, and the company has built its own software to weave its new products together with a company’s existing assets. As data use explodes, it is all about efficiency. The last big update of Dell’s flagship enterprise storage solution, Powermax, resulted in 80% power savings per Terabyte of data[3]. The operating system running on top of that has been further improved, meaning for every six of the old storage arrays, now only one is needed. On the PC side, the effect of the post-COVID normalisation has been more negative than the 2009 recession but is now starting to turn upwards. An old installed base, new chip technologies and a Windows refresh later in the year will be helpful, and Dell focuses only on the high-end premium offerings. From a very low base, the company expects growth of only 2-3%, but this could easily be higher2. So something like mid-single growth I hear you say… but this is 2024, have we been living under a rock and not heard of the “magnificent 7”? Well perhaps you can call us old-fashioned, but we still carry on down the income statement and even venture into the cash flow statement! Here is where things get more interesting. While Dell has always been well known for its supply chain prowess and efficient working capital model, and both remain in place, it has only just come to the end of an extended period of deleveraging. The dividend has just been re-started, but the market seems to have forgotten just how much cash the company can generate. Over the past 5 to 6 years Dell reported $36bn in cumulative post capex free cash flow, versus a market capitalisation when we invested of just above $50bn. In October the company even spelled it out: they want to return at least 80% of free cash flow back to shareholders. The current dividend costs $1bn, and even if it grows at least 10%, which is the ambition2, it doesn’t take much working out to realise there should be room for substantial share buybacks. Dell is a cash flow monster, but don’t worry, it isn’t coming to eat you, only itself. [1] Source: Bloomberg Jan 31st 2024
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