In Reach for Yield, HP Learns to Print Money -- Ahead of the Tape
August 23 2016 - 3:50PM
Dow Jones News
By Steven Russolillo
The scramble for yield has reached an unlikely pocket of the
market: old tech stocks. Look no further than HP Inc.
The company, which split from its Hewlett Packard Enterprise Co.
sibling last year, sells personal computers, printers and ink.
There is little growth here; cash flow is the attraction. That
gives HP the wherewithal to pay dividends and buy back stock,
something investors are especially obsessed with these days. The
shares have surged more than 20% so far this year.
With bond yields historically low and traditional
dividend-paying sectors such as utilities and telecom sitting on
big gains already, investors have expanded their sights for
yield-bearing assets. HP has benefited, even as its earnings and
sales have declined. Aside from a major disappointment when it
reports fiscal third-quarter earnings on Wednesday, its rally might
still have legs.
The struggling printer business will be a key focus in HP's
results, with ink cartridges and toner making up a majority of the
segment's profits. In June, HP disclosed plans to cut inventory of
printing supplies and reduce discounting in an effort to turn
around its signature business.
But for now at least, all that investors seem to care about is
cash generation. HP has a dividend yield of 3.4%, among the highest
of the tech old guard.
HP has paid $850 million in dividends this year and bought back
$1.1 billion of its stock. With free cash flow expected to be
between $2 billion and $2.3 billion this year, Toni Sacconaghi, an
analyst at Sanford Bernstein, estimates HP could comfortably boost
the dividend by 50%, which would push the yield above 5% at its
current share price.
That would be compelling in today's market. For instance, the
highest dividend payers among tech companies have seen their stocks
outperform the S&P 500, on average, whereas the lowest dividend
payers have underperformed, according to Mr. Sacconaghi's research
published in early August.
Fetching 9 times projected earnings over the next 12 months,
HP's valuation isn't as enticing as it was earlier this year, but
it is still cheaper than rivals International Business Machines
Corp. and Cisco Systems Inc.
HP has the reach for yield on its side.
(END) Dow Jones Newswires
August 23, 2016 15:35 ET (19:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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