Just in case there was any doubt still remaining, data released yesterday by Gartner confirms it – the PC market is dead:
“Worldwide PC shipments dropped to 76 million units in the second quarter of 2013, a 10.9% decrease from the same period last year.”
This marks the fifth consecutive quarter of declines and the longest streak of dwindling sales on record.
The culprit shouldn’t come as any surprise. It’s tablets, of course:
“We are seeing the PC market reduction directly tied to the shrinking installed base of PCs, as inexpensive tablets displace the low-end machines used primarily for consumption in mature and developed markets.”
Granted, the decline is slowing. And this quarter – as bad as it was – managed to beat estimates.
But that doesn’t mean there’s a reversal on the horizon.
In developed countries, the market is fully saturated. And not even emerging markets will provide a substantial boost to sales.
Why? Because, as Gartner analyst Mikako Kitagawa explains, they’re skipping the PC era altogether and going straight to post-PC:
“In emerging markets, inexpensive tablets have become the first computing device for many people, who at best are deferring the purchase of a PC.”
In short, the declining sales will slow until finally evening out. After that, sales will be made primarily due to growing populations and the need for existing PCs to be replaced because of age or malfunction. Like toasters. Or washing machines.
Suffice it to say, this isn’t great news for PC makers. After all, going from a beacon of technological progress to unhip manufacturers of common household appliances doesn’t exactly scream “profits.”
But despite the sea change from high growth to steady, predictable sales, there’s an upside: Unsurprising, even-keeled companies tend to be great dividend investments…
Strap Yourself In! It’s Going to Be a Relatively Uneventful Ride!
Microsoft (MSFT ) is basically the poster child for one-time booming tech companies successfully making the transition from quality equity growth stock to dependable dividend payer.
Between 1995 and 2000, Microsoft’s stock price skyrocketed 1,428%. But between 2001 to present, it’s up just a hair over 63%.
But just because it ceased rapid growth, and will probably only move sideways from here on out, it’s not a dud. It’s still worth owning.
Why? Because right around the time it lost upward price momentum, it started paying dividends. And paying them well.
Case in point: Its 2.65% yield is backed up by a five-year growth rate of 14.27%. And overall, since beginning payments in 2003, the company has increased payouts by a whopping 975%.
In other words, shareholders are still getting their money’s worth, because what Microsoft lacks in price appreciation, it makes up for in dividends.
Now, the question is, can we expect the dominant PC makers – namely Dell (DELL) and Hewlett-Packard (HPQ) – to complete a similar transition?
Short answer: It’s messy, but there’s a chance.
Just like Microsoft, both stocks benefited in a big way from the tech boom of the late ‘90s. Hewlett-Packard saw its price leap 355% and Dell surpassed even Microsoft, growing 7,975% over that period.
But the similarities end there.
While Microsoft managed to maintain a sluggish climb on the charts, Dell and Hewlett-Packard have done just the opposite, slowly moving in the opposite direction, losing 27% and 17%, respectively, over the same period.
And while Hewlett-Packard did, indeed, start paying dividends in 2004, Dell didn’t get around to distributing cash to shareholders until just last year.
But keep in mind, the downward correction in the PC market is coming to a close and, as the IDC notes, “HP and Dell saw growth improve over recent quarters, possibly indicating stronger performance in coming quarters.”
All that needs to happen is for these companies to survive this transition. And given the boost in performance this year – HP and Dell are up year-to-date 85.9% and 33%, respectively – it’s a good bet that they will.
In Dell’s case, however, “survival” means something different.
Currently, activist investor Carl Icahn and Michael Dell himself are entrenched in a battle over the future of the company. Dell wants to take it private, and Icahn wants majority ownership, while keeping 40% of it on the open market.
This power struggle has been going on for months. Ever since I first wrote about the Icahn-Dell dustup back in March.
Given the company’s extremely uncertain future – never mind the fact that it has a dividend history only a few quarters long – Hewlett-Packard, with a long line of payments and steady increases since 2011, has a much better chance than Dell of following in Microsoft’s footsteps.
But, in the end, It’s simply too early to tell just where the cards will fall. The transition for PC makers everywhere has been turbulent. The dust is still settling. And uncertain times aren’t a good fit for income investments.
But when the steady decline in PC sales ceases, prices will stabilize and dividends will have to be paid, from whoever’s left standing to pay them – or shareholders are going to run for the hills.
Safe investing,
Ryan Anders
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