2023-08-07 12:57:08 ET
Summary
- HP Inc. has declared its quarterly dividend of 26.25 cents, marking the 4th consecutive quarter with the same dividend, indicating a likely annual dividend increase in Q4 2023.
- HP's dividend growth history shows consistent increases since 2015, and the company's strong dividend coverage suggests it can afford a further increase.
- Dividend coverage seem strong on commonly used metrics but diminishes when debt load is considered.
- HPQ can be a profitable stock when bought at the right price, but the current price is not close to being right.
HP Inc. ( HPQ ) recently declared its quarterly dividend of 26.25 cents as Seeking Alpha has reported here . Why is this worthy of an article you may ask. Because this marks the 4th consecutive quarter that HP has paid the same dividend, which means the company is likely to announce its annual dividend increase when it declares its next dividend in the last quarter of 2023.
But does that make the stock a buy here? Let's find out while also predicting the new quarterly dividend. Before that, let's take a quick look at the company's history and its dividend history.
Old Wine In A New Bottle
HP Inc., in its current form, was formed in 2015 when the venerable Hewlett-Packard Company (founded in 1939 and an inspiration to Steve Jobs) spun off its enterprise product and services division as Hewlett Packard Enterprise ( HPE ). HP Inc. develops and sells personal computers, printers, and related accessories.
HP Inc., despite being generally seen as a company in decline, is still the 2nd largest PC vendor by unit sales as of 2022 with its 19.40% market share being second only to Lenovo's 24.10%. In 2022, HP Inc. reported an astounding $63 billion in revenue. I am calling it "astounding" because the company's market cap is about half that at $32 billion.
HP's Dividend History
With that impressive company history out of the way, let's now look at HP's dividend history.
- According to Seeking Alpha and HP's website , HP has been paying dividends since at least 1989. That's quite impressive dating back more than three decades.
- HP has been increasing dividends since 2011 according to Seeking Alpha, which places the company's dividend growth streak at 12 and the (likely) upcoming dividend increase makes HP's dividend growth a soon-to-be teen.
- Since the HPE spin-off, HP Inc.'s quarterly dividend has grown from 12.40 cents per share to 26.25 cents per share. In other words, a 112% cumulative dividend growth in 8 years.
- Since 2015, the company has set a reliable pattern of announcing a dividend increase in the last quarter of the year, typically in November , with the new dividend being paid in December.
Dividend Coverage
Now, all the above is in the rearview mirror. To estimate HP's 2023 dividend increase, let us look at how much the company can afford.
- Total shares outstanding : 986 million, which has gone down an impressive 37% since 2018.
- Current quarterly dividend per share: 26.25 cents.
- Quarterly Free Cash Flow ("FCF") required to cover dividends: $258 million, which is 986 million shares times 26.25 dividend per share.
- Average FCF over the last five years: $936 million.
- Payout using five-year average quarterly FCF: 27.50% ($258 million divided by $936 million). That's an impressive payout ratio for a company that has been paying dividends since 1989 and especially one that is considered to be outdated and in danger of survival.
- Average quarterly FCF over TTM: ~$540 million, which gives HPQ a payout ratio of 48% using TTM FCF.
- Using forward EPS of $3.47, HP has a payout ratio of 31% based on current annual dividend of $1.05 per share.
In a nutshell, I am little surprised but very impressed at the strength of HP's dividend based on both FCF and EPS. I was expecting the company to have a much tougher time to cover its payout given the general concerns about PCs being outdated.
Debt and Cash Situation
As strong as HP's dividend coverage seems, it is still prudent to ensure the company is not over-leveraged and has a robust balance sheet. And I am glad that I did because this sprung another surprise in the other direction as HP's debt level of $10.60 billion has almost doubled in the last 5 years. In addition, the company's cash and short-term investments have gone down by two-thirds in the last 5 years to sit at about $2 billion. Finally, HP Inc's negative debt-to-equity raises serious questions about the company's return on investments compared to the interest it pays on its high debt.
To summarize this section, the strength in FCF and EPS have been nullified by the weak debt and cash situation, making me wonder whether the stock's low valuation may actually be justified.
New Dividend Forecast
So, what can investors expect from HP when it likely announces a dividend increase in November? I tend to go by recent history but only if that is supported by a company's fundamentals at present. Despite debt concerns, I am fairly confident that HP will announce a moderate dividend increase, say 5% to 8%, placing the new quarterly dividend between 27.50 cents and 28.50 cents per share.
Year | New Quarterly Dividend | Dividend Growth % |
2017 | 0.1393 | |
2018 | 0.1602 | 15.00% |
2019 | 0.1762 | 9.99% |
2020 | 0.1938 | 9.99% |
2021 | 0.2500 | 29.00% |
2022 | 0.2625 | 5.00% |
Five-year Average | 13.80% |
But Does That Make The Stock A Buy?
Risks:
While I am fairly confident about the company's ability to pay increasing dividends (dividend growth rate will likely slow down though), there are a few risks associated with investing in this company. First, sticking to the debt issue brought up above, HP has incurred nearly $300 million in debt in the first two quarters of 2023. You may recall that the company needs nearly $300 million/qtr merely to meet its current dividend commitment to shareholders. This should be at the top of the list to monitor for anyone invested or interested in HP Inc.
HP, obviously, saw a huge surge in demand through COVID and that was never going to last. But it is still concerning to note that the company's revenue is on a noticeable decline in all regions as shown below. Recovery is unlikely to be quick with most companies still adjusting for their own excesses from the COVID era.
Finally, from a valuation perspective, the stock has not enjoyed too much of a premium since the 2015 spin-off as shown below. While the forward PE is close to 10, it is important to note that the market has not awarded the stock a multiple greater than 10 too many times.
Conclusion
While HPQ appears cheap on a valuation basis with a single-digit forward PE, I agree with this SA analyst that the stock is inexpensive for a reason. While the 3.25% yield looks safe enough and is likely to increase in November, I am not too comfortable recommending this stock as a "Buy". However, being a consumer staple basically, HP Inc., the company should be able to survive through most economic cycles while returning money to shareholders and can be profitable at the right buying price. That buying price is not $32.43 and hence, I rate the stock a "Hold".
For further details see:
HP Inc: Debt Clouds Dividend Safety Amidst Slow Recovery