Is Hewlett-Packard's Dividend Reason Enough to Buy?

In the technology industry, there's perhaps no better turnaround story right now than Hewlett-Packard (NYSE: HPQ  ) . After reporting several consecutive quarters of declining revenue, its shares collapsed, only to strongly recover over the past year. In fact, its rise from the depths has been so strong you'd think nothing at all was wrong with the company. But judging a company by its share price performance can often be misleading.

HP continues to struggle and its underlying business is by no means out of the woods. And yet, its share price does not reflect its struggles. HP has been able to keep shareholders relatively happy with a strong dividend yield that is very competitive within the technology sector. And, thanks to its ability to generate cash flow, the company even offered investors a dividend increase recently.

But investors should take caution before celebrating HP's return to glory. Despite its willingness to send more cash back to shareholders, HP's core segments continue to underperform. That's why technology enthusiasts may want to look past HP and consider Microsoft (NASDAQ: MSFT  ) instead.

Is HP's dividend masking its struggles?
For better or worse, HP's core business continues to be hardware, particularly PC-reliant hardware. It's busily building out its other software and services businesses, but its large printers segment continues to drag it down. HP's revenue fell 7% in 2013, and the company followed this performance with a 1% revenue decline in the fiscal 2014 first quarter.

The struggles of firms still dependent on the personal computer should come as no surprise. Several large technology companies that rose to prominence during the PC era are looking more old and stodgy with each passing quarter. Take semiconductor giant Intel (NASDAQ: INTC  ) as an example. For years it whiffed on its attempts to get its chips into mobile devices. It basically missed the boat on the global smartphone boom and has been trying to play catch up ever since, with little to show for it.

Intel posted declining revenue, gross margin, and earnings per share last year. Intel has demonstrated a notable lack of ability to get its chips into tablets, smartphones, and other mobile devices, and the results speak for themselves.

Like HP, Intel is relying on its hefty dividend to keep shareholders from fleeing for the exits. Intel's 3.7% dividend yield is nice, but technology investors should be more concerned about growth than yield, and that's where Intel is coming up short.

HP runs the same risk in that regard. It recently increased its dividend by 10%, which will likely satisfy investors who like to receive income. But there are more pressing needs for HP to be concerned with, the most concerning of which is its continued lack of revenue growth.

A better tech stock for growth and income
Microsoft's cloud-based offerings are performing tremendously. Its commercial cloud services, which include Office 365, Azure, and Dynamics CRM Online, more than doubled quarterly revenue versus the same quarter last year.

The real growth engine at Microsoft is its commercial licensing, which accounts for nearly half of the company's total revenue. Gross margin at that division clocked in at 92% over the past two quarters. Microsoft showed a tremendous ability to rise above what's amounted to relatively modest overall IT spending at the enterprise level, because it's taking share from competitors.

This allowed Microsoft to post 14% revenue growth in its most recent quarter. And, for investors who insist on receiving a dividend, Microsoft provides a very healthy 2.8% yield.

The Foolish takeaway
HP has made some solid progress over the past couple of years. It's slowed the rate of its revenue decline, and recently gave investors a dividend increase. But that's a far cry from declaring the company's turnaround as a done deal.

After releasing first quarter results, HP Chief Executive Officer Meg Whitman stated that the company is in a stronger position today that it has been in some time. While HP's ability to slow its revenue decline is a good start, a lot of progress needs to be done in order for its turnaround to materialize. That's especially true since HP's share price has skyrocketed over the past few months.

For investors who want yield in the technology sector, Microsoft looks to be a much better bet. Its underlying business is growing, thanks to its success in cloud-based products and services.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 22, 2014, at 11:05 AM, JimBo11 wrote:

    Bob Ciura of Motley Fool: I agree with your comment on HP, but MSFT appears to be under attack too. Its Windows and Office software are in declining, yet the stock price is rising to the astrosphere, buyer should be cautious too. In the last week or two I see a lot of speculations in the market; I also see the stock market is like a casino, where the hedge fund managers are manipulating the market to sell high with rumors and drive the market up and down to their advantage, the poor little guys or the young and inexperienced got slaughtered. On Friday, the triple witching hours, it was 5.3B share vs. a normal about 3.2B share trade in a normal day. It is a good example; where they build it up to the week with options and sold them at the high to rip a good profit. There were large option volumes traded for many stocks on Friday. Fyi.

  • Report this Comment On March 24, 2014, at 2:23 PM, SaveHP wrote:

    HP will have brief peaks, but will end up out of business without the innovation and leadership that is needed. Meg Whitman and the Board are failing shareholders and the PR machine just keeps whirling out excuses about a five year turnaround.

    I've compiled some data on my meg-whitman-hp-exposed.blogspot property and will update with new information from this last Board election shortly.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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