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Don’t Get Caught Up in HPQ’s Shinier Dividend

The 10% hike is nice, but no reason to get in

   

It’s full steam ahead at Hewlett-Packard (NYSE:HPQ), as the embattled board of directors provided investors with a little treat: a 10% increase in HPQ’s dividend, effective in May.

Ooooooooooh.

Does Meg Whitman seriously believe this will be enough to entice new shareholders and keep old ones?

Well … maybe.

If you got into HPQ late last year when it languished in the $12 to $13 per share range, HPQ doesn’t look too bad right now. Depending on when you bought in, you’re not only enjoying a yield on cost of up to 5%, but you’re also sitting on up to 90% returns. At that point, you’re playing with house money, so your options look a lot better.

But the story is different for those who have been riding things out for years hoping for a long-term turnaround, or those who might be considering getting in now — both are looking at a much lower yield (2.5% at current prices), and the former also has some serious paper losses to consider.

Me? I wouldn’t bother.

It’s not that HPQ can’t afford it. It certainly has the money to burn, and thus has time on its side. At the end of January, Whitman & Co. sat on $13 billion in cash and generated $2 billion in free cash flow. Last year it paid out just over $1 billion in dividends; an additional $106 million isn’t going to crack the vault.

But I have no reason to believe CEO Meg Whitman isn’t focused like a laser on making the company relevant in some way, shape or form. That means any dividend increases — which, normally, I’m all for — are nothing more than a diversion to hide deeper problems.

You can start with the company’s inability to figure out acquisitions (a la the Autonomy fiasco), but the real problems are the PC business continues to shrink before Whitman’s eyes, and even though HPQ is now back in the tablet biz, it’s very late to a very crowded game.

No amount of layoffs — and HPQ is expected to trim 29,000 jobs by fiscal 2014 — will solve those problems.

HPQ does hope to essentially implement the IBM (NYSE:IBM) model and slowly migrate from a hardware company to a software and services model, using its expansive PC and server install base as both a cash cow to tide it over during the migration, and as a customer entry point. That model takes lots of time, money and patience, however.

And that brings us back to the initial issue.

If you’re looking to jump into HPQ, you’re hoping for a turnaround in tech — not a high-percentage bet in the first place, and this particular turnaround bid is getting long in the tooth. Meanwhile, all you have to protect yourself is a decent but unspectacular 2.5% yield after a modest 10% increase.

The risks to a real recovery seem too high, and the potential for meaningful returns near-term is low — especially considering Hewlett-Packard’s high bounce off its late-fall lows. And frankly, if you’re just looking for somewhere to park and collect income, you could do far better in telecoms or utilities.

If you’re already a shareholder, what you do next is all up to your cost basis. If you got in years ago, cut your losses and be thankful for the opportunity. If you rode up since fall and you’re sitting on a great yield on cost, while I’d advise taking some profits, you’ve got little to lose by sticking around longer and watching Meg’s dividend act.

Just don’t look away.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/03/hpq-magic-trick-just-enough-to-divert-your-attention-hp-ib/.

©2014 InvestorPlace Media, LLC

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