Wed. Dec. 05, 2007
by Lynn A. Tyson, VP - Investor Relations
Yesterday, Dell held its annual shareholder meeting for fiscal-year 2007. It was postponed from July of this year due to the delay in the filing of our Fiscal 2007 10K and Proxy. It's been a busy few days for our IR team - our first earnings conference call in over a year - which was also a strategy call - quickly followed by the shareholder meeting. So I am a bit later with this post than I'd like - and I apologize for that - I'm still learning about how to communicate in a blog environment!
I thought this would be a good time to talk about the mechanics of a shareholder meeting and its role in the corporate governance process. I will also discuss speculation surrounding our share repurchase program. I hope this will help to answer some of the questions people have asked us recently via calls, emails and this blog.
So let's start with the shareholder meeting. The requirement to have an annual shareholder meeting is usually set forth in a company's By-Laws. Many companies also have a meeting of their Board within a day or so of the shareholder meeting, and then have the Board members stay on for the shareholder meeting. Shareholders of "record" - meaning they have to have owned shares on a certain date - can submit proposals to the company for inclusion in the proxy so long as the proposal meets certain requirements. For a shareholder to be able to submit a proposal, they must either own 2,000 shares of the company or hold shares equivalent to 1% of the company's stock. Also, the company can submit its proposals; such as nominations to the board of directors, compensation plans, and ratification of auditors.
This year we had five proxy proposals and the results from the proxy vote can be found here. For shareholder proposals that were not passed, shareholders can resubmit the proposals the following year if specific support thresholds were achieved.
At the shareholder meeting Don Carty talked about the financial health of the company and our commitment to growing the company in a responsible and profitable way - a way that can generate sustainable cash returns, which ultimately drives shareholder value. Michael Dell talked about our five key priorities. Following which, they both answered questions from the audience and the web. Investors were interested, among other things, in expressing their interest in Dell paying a dividend, as well as commenting on our compensation practices. Shareholders also asked for management's take on why the company's stock declined last week despite announcing a 9% Y/Y increase in revenue and a 26% increase in EPS.
So now let's turn to share repurchase. We voluntarily suspended our share repurchase program in September of 2006, choosing instead to wait until after our Audit Committee completed its independent investigation and we filed our past due SEC filings. All of this was completed by October of 2007. We did not resume our buyback then because we were in "blackout" from earnings last week. "Blackout" is the period before and after a company's earnings when it cannot buy back its stock.
Dell's Board met on Monday, Dec. 3rd where they voted to authorize a $10 billion share repurchase program. There has been a lot of speculation about this program - unfortunately we could not talk about it until the Board actually made a decision on what we were going to do. A company can invest its capital in several things. And it can get its capital from several places. At the end of the day a company wants to generate a return on its capital that's in excess of what it costs the company to obtain that capital - that's how it creates value for its shareholders.
Let's start with how companies obtain capital. First, a company can generate cash from their business: over the last four quarters Dell generated about $4 billion in cash flow from operations. Second, a company can have money already "saved" in the form of cash and cash equivalents -- or investments. Third, a company can borrow money - or debt. Fourth, a company can sell more stock in the company - or issue equity. And fifth, a company can sell some of its assets. Since Dell has historically generated cash in excess of the cash required to run the business, we've saved a lot of cash and then used this cash from operations to buy back our stock.
As far as how a company can invest its capital - it can do a few things. First, it can invest in its own business by building manufacturing facilities or other buildings- these are called capital investments. Second, it can use capital to buy other companies - or acquisitions. Third, it can buy back its own stock. And fourth, it can pay a dividend. How a company allocates its capital across these opportunities varies from company to company. And depending on the current business priorities, economic environment or company valuation, a company's capital allocation can change over time. No two companies are alike.
So why does a share repurchase program matter? Simply stated, ceteris paribus, buying back shares reduces the number of shares outstanding and increases shareholders' stake in the future cash flows of the company.
Some have asked if we will borrow to fund our share repurchase plan since most of our cash, like many global companies, is outside of the United States. We look at our investments in aggregate - so this includes share repurchase, capital expenditures and acquisitions. Right now we believe we have sufficient liquidity to fund these activities - but this could change over time and we have said that we could use the cash we have on our balance sheet as well as debt to fund investments. At the end of the day we want to maintain our financial flexibility.
Since we will start to execute this current authorization through open market purchases, many people would like us to say exactly when and how we will buy the stock. This is really not prudent and most companies don't do it. What we have said is that share repurchase will likely be one of the key uses of our capital both now an in the future.