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

For investors looking for yield in the technology space, here's why Microsoft is a better bet than HP.

Mar 22, 2014 at 10:00AM

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.

More compelling ideas from The Motley Fool
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Bob Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers