Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
HP Inc (NYSE:HPQ)’s Dividend Growth Score of 63 suggests that the company has decent dividend growth potential.
The company has increased its dividend for 6 consecutive years and paid uninterrupted dividends for over 25 years.
As seen below, HPQ has delivered excellent dividend growth over the years. The company has raised its dividend by 9.4% per year over the last decade and 15.0% annually over the last three years.
Source: Simply Safe Dividends
Management is challenged with the tasks of maintaining HP’s brand leadership, supporting the company’s distribution network, and maximizing cash flow in mature markets.
Revenues in each of the five major business segments have experienced negative growth over the past three years. Adverse currency translations have further crimped reported growth. The focus going forward is all about controlling costs and managing assets.
Rightsizing the company is a major HP project over the next few years and could impact future dividend growth.
However, with reasonably healthy payout ratios and solid free cash flow generation, I believe HPQ is positioned to continue rewarding shareholders with moderate dividend growth.
Management last raised the dividend by 8% in February 2016, and low-to mid-single digit annual growth will likely continue.
Valuation
Shares of HP Inc. trade at a forward-looking price-to-earnings (P/E) multiple of 9.3 and offer an above average dividend yield of 3.2%.
A low P/E multiple is often a sign that investors expect a company’s profits to contract or at least fail to grow. In HP’s case, this seems to be valid concern.
I am uncomfortable forecasting a long-term earnings growth rate for the business because of the many uncertainties it faces.
In my view, an investment in HP really comes down to whether or not an investor believes HPQ can stabilize its current business and find a way to return to growth in the next couple of years.
HPQ could turn out to be an excellent investment if management unlocks the next profitable growth driver for the company, but I think the odds are stacked against them.
The market seems to agree considering HPQ’s P/E multiple.
Conclusion
For investors seeking safe current income with moderate growth, HPQ looks like a reasonable bet at first glance.
The company’s current double-digit dividend growth days are not likely to last forever, but payout raises have plenty of support to continue at a pace well in excess of the rate of inflation. This is supported by HP’s low payout ratios, excellent free cash flow generation, and solid balance sheet.
However, an investment in HPQ is not without risks. The stock’s low P/E multiple could very well be cheap for a reason.
The company is driven by trends in several mature and highly competitive markets. Should market conditions begin to deteriorate more quickly as technology trends evolve, HPQ’s profitability could contract.
HP Inc. is presumably now better positioned to compete as a freestanding corporation, but technology hardware is a risky industry to participate in.
Investors considering a stake in HPQ will need to keep an eye out for developments impacting the PC and printer markets, which are cash cows today but might not be around forever.
Until HP has found its next growth driver, my preference is to avoid the company. The road to profitable growth could prove to be long and very costly for HP and its shareholders.
For now, I prefer to stick with some of my favorite blue-chip dividend stocks here.
Additional Links
(1) http://h30261.www3.hp.com/~/media/Files/H/HP-IR/documents/results/2016/quarterly-results/q316-hp-inc-investor-presentation.pdf
(2) https://www.idc.com/getdoc.jsp?containerId=prUS41584116
(3) http://h30261.www3.hp.com/~/media/Files/H/HP-IR/documents/results/2016/quarterly-results/q316-hp-inc-investor-presentation.pdf
