Shares of 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.
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. (IBM - Free Report) , Hewlett Packard Co. (HPQ - Free Report) , NetApp Inc (NTAP - Free Report) 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).