HPQ HP Inc

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 24, 2016 02:47 ET (06:47 GMT)

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