It really must be head-spinning time out at Hewlett-Packard (NYSE:HPQ). And by head-spinning, I mean the Regan in “The Exorcist” kind.
The last few years have been baffling to say the least at HP. These has been a spate of high-priced buyouts that have come to nothing, including the $1.2 billion acqusition of Palm. There has been yet another change at the top of the HP pyramid with the appointment of Meg Whitman to the top post, the ninth change in the CEO chair since 1999. And most recently investors learned of plans to combine the printers and PC business at Hewlett-Packard.
The latest? Just last Friday Hewlett-Packard authorized a modest 10% hike in the company’s quarterly dividend, while also promising to increase the dividend annually by double digits. That will give the company a respectable yield of around 2.1%.
Don’t be fooled by the payout promises though. The real story of what HP is going through can be easily summed up in three simple points:
- HPQ stock has lost nearly $35 billion in market value in the past year, and is desparate to show value for shareholders holding on for the long haul;
- Recent structural changes to the company’s business lines will eventually wring out enough in cost savings to find economies of scale, but that’s the best plan to “grow” the business;
- Nobody in the Wall Street trenches will notice the dividend or any real changes at HP.
In short, Hewlett Packard is at best a company slightly out of control, and at worst a company completely out of touch
This is not to say the dividend is a bad move. On a purely cash basis, the move will have little effect either short or long term on their overall ability to pay the dividend: HP generated nearly $11 billion in cash flow in fiscal year 2011, more than enough for a payout slightly in excess of $1 billion annually. HP also maintains a healthy if not Apple (NASDAQ:AAPL)-like war chest of $8 billion in cash.
From a basic dividend investor perspective, HP’s 2.1% dividend yield is fairly attractive. But sustainability and the yield are not quite the issue.
The recent combining of HP’s Personal Systems Group (PSG) and the HP Imaging and Printing Group (IPG) is viewed in many quarters as nothing more than an opportunity to find ways of cutting costs (read: jobs) across two struggling business units.
Both groups operate in brutally competitive markets where market share, revenues, and profits are at a premium. PSG is under siege by competitors like Lenovo (PINK:LNGVY) and Dell (NASDAQ:DELL), while the printing business margins continue to erode. The merge may do little to turn around either division, and do nothing to help those who will be eased out.
Whitman acknowledged during the Annual Shareholder meeting last week that the company faces “real challenges” ahead, and this one just might be the tip of the iceberg.
It’s difficult squaring up rewarding shareholders with the promise of continued increases in their dividends, as employees are forced out from yet another CEO trying yet another restructuring (see also: Leo Apotheker).
So either HP’s management is too out to lunch to recognize the image problems with such moves, or they are simply too tone-deaf to care.
There are obviously changes that need to be made. But HP management has their work cut out for them as they find a way to get through yet another possible lapse in perception.
And remember, sometimes perception is just reality.
Marc Bastow is long in AAPL.