EMC Corp. (
rallied 5.37% to close at $24.93 on May 30, 2013, after the data
storage systems provider announced that its board of directors
has increased its existing $1.0 billion share repurchase
authorization to $6.0 billion.
The share repurchase program is expected to be complete by Dec
31, 2015. EMC expects to buy back shares worth $3.5 billion by
the end of second quarter of 2014 of which $500.0 million has
already been spent in 2013.
EMC also announced that it will initiate a quarterly dividend
payment. The company will pay a cash dividend of 10 cents on Jul
23 to shareholders of record as of Jul 1, 2013.
The shareholder friendly move comes at a time when EMC is
bearing the brunt of a slowing IT spending environment. In the
recently concluded first quarter of 2013, revenues climbed a
modest 5.8% year over year but declined 10.7% sequentially to
$5.39 billion, missing the Zacks Consensus Estimate.
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EMC's bottom-line results have been mixed over the last four
quarters, with an average beat of only 0.3%. Most significantly,
the modest revenue growth has put operating margins under
pressure. In the first quarter, operating margin contracted 30
basis points (bps) on a year-over-year basis and 450 bps from the
previous quarter to 18.9%.
Year-to-date, EMC shares have remained almost flat compared to a
13.1% jump in S&P 500, reflecting modest quarterly results
and a declining IT spending environment. The not-so-impressive
share performance also put EMC management under tremendous
pressure to return capital to shareholders.
In such a scenario, the increase in the share buyback program and
the scheduled dividend payment will boost shareholder confidence.
As of Mar 31, 2013, EMC had cash and cash equivalents of $12.00
billion. Therefore, the company should not have any trouble
spending the targeted amount on share repurchases, which will
boost earnings growth.
Moreover, EMC expects to add debt to its capital structure in the
near term. Given EMC's strong cash flow generation ability, we
believe that the increasing liquidity will provide the financial
flexibility required for strategic investments such as
acquisitions going forward.
However, increasing competition from the likes of
International Business Machines Corp. (
Hewlett Packard Co. (
NetApp Inc (
and a sluggish IT spending outlook for the next sveral quarters
will continue to keep margins under pressure in the near term.
Currently, EMC has a Zacks Rank #3 (Hold).