A Leaner Dell Faces Challenges on Many Fronts

Posted: Sep 26, 2008 12:01 AM

Q. Are things looking up for my Dell Inc. shares? -- R.H., via the Internet

A. The world's second-largest computer-maker, behind Hewlett-Packard Co., has become leaner and more aggressive as it attempts to complete its turnaround.

It eliminated 7,000 jobs last year while adding 2,700 through acquisitions. It is reducing its product-design costs as well.

Famed for build-to-order direct sales, the firm is rapidly expanding its sales of computers through retailers. It is creating products specifically for the 13,000 stores in which its products are sold, including Wal-Mart, Best Buy, Staples, Costco Wholesale and China's Suning Appliance.

The question for investors is whether it can simultaneously increase both its retail and direct sales. Fiscal second-quarter net income dropped 17 percent, largely due to extensive price-cutting of products for retailers and overseas.

Wal-Mart has begun to test product installation and repair services in a joint venture with Dell. The two are marketing those services in kiosks in 15 Dallas-area Wal-Mart stores during the next few months.

Strong sales of notebook computers and servers, coupled with continued gains in emerging markets of Asia, Latin America and Eastern Europe, are positives for the company. It is scaling back its rapid expansion in Western Europe.

Dell recently launched a line of streamlined business notebook computers for "digital nomads," those workers who travel for a living.

Shares of Dell (DELL) are up 5 percent this year following declines of 2 percent last year, 16 percent in 2006 and 29 percent in 2005. It has little debt and more than $3 billion in annual free cash flow.

Another positive signal: Michael Dell, who founded the company in 1984 and returned to be its chief executive in January 2007, has bought about $100 million worth of its stock during 2008.

The consensus rating on Dell stock is a "buy," according to Thomson Financial, consisting of seven "strong buys," nine "buys," 10 "holds" and two "sells."

"While I am encouraged with our progress, we still have much work to do to restore our competitive position," Dell said in announcing his plans to cut costs by $3 billion by 2011. Chief Financial Officer Brian Gladden, a former General Electric Co. executive hired this year, is in charge of the belt-tightening.

Earnings are expected to increase 21 percent this year, compared with 8 percent projected for the personal computer industry. Next year's gain is projected at 17 percent versus 21 percent for its peers. The forecast for a five-year annualized growth rate of 13 percent compares with the 14 percent industrywide expectation.

Q. Is Hartford Dividend & Growth Fund worth investing in? -- V.L., via the Internet

A. Large-capitalization value funds have had a tough time of it, but this one has done much better than most of them.

A primary reason is that it embraced energy stocks and kept financial holdings relatively low. It moved money into natural gas firms such as XTO Energy Inc. and benefited from rebounds of large-company stocks such as International Business Machines Corp. and Wal-Mart Stores Inc.

The $4 billion Hartford Dividend & Growth Fund "A" (IHGIX) is down 9 percent over the past 12 months, and its three-year annualized return is 6 percent. Both results rank in the top 11 percent of large-cap value funds.

It has a 1.09 percent annual expense ratio.

"With the caveat that it could be cheaper, I recommend this fund because it is a strong performer that could be a good anchor for a portfolio over time," said Paul Herbert, analyst with Morningstar Inc. in Chicago. "It is buying stocks to hold and focuses on established companies."

Edward Bousa of subadviser Wellington Management has been portfolio manager since 2001. He was previously with Putnam and Fidelity, where he built solid records. Emphasizing dividend-paying stocks, Bousa keeps his position sizes small to reduce risk and makes judicious sector bets versus the overall market. The fund's price volatility is low.

"Wellington Management is a highly respected money manager that has a lot of analysts with a lot of experience, which should help this fund over time," Herbert said. "I actually think Growth & Dividend would be a better name for this fund, since most of your return will be from capital appreciation in the stocks in its portfolio, with the dividend secondary."

Among its largest concentrations, energy represents 21 percent of assets, industrial materials 15 percent, health care 12 percent and financial services 12 percent. Foreign stocks represent about 15 percent of the portfolio. Top holdings are Chevron Corp., AT&T Inc., Exxon Mobil Corp., IBM, Total SA, General Electric Co., Exelon Corp., Eli Lilly & Co., Wal-Mart and Encana Corp.

Hartford Dividend & Growth Fund has a 5.5 percent "load" (sales charge) and requires a $1,000 minimum initial investment.

Q. What has been the best-performing stock sector over the past 10 years? Can it make sense to invest in sectors if you pick a winning sector? -- C.D., via the Internet

A. Energy has been the best-performing stock sector (group of industries) the past 10 years, with an annual compound growth rate of 12.8 percent, according to Standard & Poor's Corp.

Second is materials at 7.2 percent, followed by industrials at 5.5 percent. Telecommunications is the worst-performing, with a 4 percent decline.

Although some investors have profited with a system of investing in strong sectors, it is a tricky business usually best left to professionals.

"There are lots of techniques for investing in sectors, but many people give up because not every technique works all the time," said Sam Stovall, S&P senior investment strategist, who trades among sectors using exchange-traded funds.

Stovall's technique is to invest in the three sectors with the strongest trailing 12-month price performance and avoid those with the lowest 12-month performance. He examines those sectors each month and rotates his portfolio into sectors meeting his criteria. That system requires rotating among sectors at least once a quarter, he said.