Dell Inc.'s stock rose Wednesday as investors embraced the computer maker's announcement that it will soon pay its first dividend.
THE SPARK: On Tuesday Dell said that its strong cash flow will enable it to add a dividend program beginning in the third quarter. The company plans to pay a quarterly dividend of 8 cents per share, giving shareholders steady income.
The payment represents a yield of 2.7 percent based on Tuesday's closing price of $11.97. The yield measures annual payouts to shareholders against a company's stock price.
THE BIG PICTURE: Many technology companies have tended not to pay dividends, instead choosing to spend more on research and new products to drive growth. Shareholders may then be rewarded by a rising stock price.
But Dell rival Hewlett-Packard Co. has long paid a dividend, while Windows maker Microsoft Corp. announced its first dividend in 2003. Apple Inc., the world's biggest technology company, said in March that it would start paying one in the July-September quarter. Networking equipment maker Cisco Systems Inc. started paying a dividend last year.
Dell has been struggling with weak sales of PCs as consumers increasingly opt for tablets and smartphones like Apple's iPads and iPhones. And the tough economy is pressuring technology budgets of the public sector and some businesses.
The company's shares are down about 23 percent over the past 12 months.
THE ANALYSIS: Sterne Agee & Leach's Shaw Wu said that with more technology companies beginning to pay out dividends, Dell may have felt pressure to start one to attract shareholders. He said that Apple's dividend plan, in particular, has ramped up the competition for shareholders' dollars.
Dell's dividend yield is richer than some other tech companies: Apple's is 1.8 percent, HP's 2.4 percent, Cisco's 1.9 percent and IBM Corp.'s 1.8 percent
But it may not be the best strategy for Dell, he said.
"Our concern is that Dell will have less cash to reinvest and for larger, more transformative acquisitions," he wrote.
The analyst reiterated a "Neutral" rating, saying the company must be more aggressive in trying to transform itself. Dell has been buying up software and services companies in an effort to move beyond PCs.
SHARE ACTION: Shares of Dell gained 45 cents, or 3.7 percent, to $12.42 in midday trading, making it the biggest gainer in the Standard & Poor's 500 index.