This is a first look at Hewlett-Packard (HPQ) after its 49.3% stock price decline since April 2010.
Hewlett-Packard manufactures and sells information technology products and services to businesses and consumers worldwide. With the recent EDS acquisition, we estimate services will constitute about one third of sales, slightly similar to personal computers (30%) but higher than printers (20%) and enterprise storage and servers (13%). The remainder of company sales come from software, financing, and other corporate investments.
Morningstar’s take on HPQ
Hewlett-Packard's services engagements are typically large, long-term in nature, and expensive for the customer to migrate to another vendor. HP has aggressively expanded its services offering in pursuit of the successful IBM IBM model in recent years, most notably with the acquisition of EDS in 2008. Services for HP are not simply a stand-alone offering, but rather a complementary segment to the other technology offerings. Stand-alone hardware can be quickly commodified; by wrapping software and services around its hardware strengths, HP raises customer switching costs by increasing its customers' reliance on the firm.
Market price: $27.27
Shares: 1.99 billion
Market cap: $54.18 billion
DIVIDEND RECORD
HPQ has paid an $0.08 quarterly dividend since 1998 with the exception of 4Q2009 (no dividend). Hewlett-Packard is not a dividend grower that keeps up with price inflation. Price inflation has eroded about 39% of the dollars purchasing power since 1998, yet the dividend remained the same over this time period. This is the same effect as a gradual dividend cut. They finally increased the dividend to $0.12 per share in 2Q2011.
Dividend: $0.12 quarterly
Dividend yield: 1.76% ($0.48 DIV/$27.27 share price)
Dividend payout ratio: 11.3% ($0.48 DIV/$4.26 EPS according to Google Finance)
EARNING POWER $3.99 EPS @ 1.99 billion shares
EPS Net inc. Shares Adj EPS
2006 $2.18 $6,198 M 2,852 M $3.11
2007 $2.68 $7,264 M 2,716 M $3.65
2008 $3.25 $8,329 M 2,567 M $4.19
2009 $3.14 $7,660 M 2,437 M $3.85
2010 $3.69 $8,761 M 2,372 M $4.40
2011E $4.67E $9,293 M E 1,990 M $4.67 E
6 year average adjust earnings = $3.99 per share
Consider contrarian buying below $31.92 (8x avg. earnings)
Consider value buying below $47.88 (12x avg. earnings)
Consider investment buying between $47.89 and $79.79 (12x – 20x avg. earnings)
Consider speculative selling above $79.80 (20x avg. earnings)
BALANCE SHEET
Hewlett-Packard’s balance sheet is completely stagnant.
Book value per share: $17.69
Price to book value ratio: 1.5
Current ratio: 1.15 TTM (over 2.0 is good)
Quick ratio: 0.70 TTM (over 1.0 is good)
CONCLUSION
Hewlett-Packard’s dividend is pathetic. HPQ could be a high dividend stock if the executives would choose to pay 80% of earnings as dividends instead of 10%. A $0.80/quarterly dividend would result in an 11.7% dividend yield and might get investors a reason not to sell the stock like they have since its $53.86 top in April 2010. The company’s earnings have held up for the past five years, so something else is the cause of the stock’s decline since April 2010. HQP does not have a strong balance sheet. Shareholder equity is stagnant. Don’t buy HPQ despite its low valuation until you know why the stock has lost 49.3% of its share price since April 2010. A bear market in stocks informs me that there will be opportunities to buy HPQ at much lower prices.
DISCLOSURE
I don’t own Hewlett-Packard.
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