Lenovo (NASDAQOTH:LNVGY) and HP (NYSE:HPQ) are the two largest PC makers in the world. Lenovo controlled 20.7% of the world's PC market in 2016, according to Gartner, up from 19.9% in 2015. HP's share grew from 18.3% to 19.4% during that period.
Lenovo and HP are often mentioned in the same breath, but the two companies have very different models for business and dividend payments. Let's take a closer look at Lenovo and HP's businesses to see which company is a better play for income investors.
How are Lenovo and HP different?
Lenovo's business is mainly built on acquisitions. It acquired IBM's PC business and x86 server businesses, which became the foundations of its PC and Data Center businesses. It bought Motorola Mobility from Alphabet's Google in 2014, which boosted the weight of its Mobile business.
Meanwhile, HP slimmed down by splitting with Hewlett-Packard Enterprise in late 2015. HP retained the PC, printing, and imaging businesses, and HPE kept the enterprise hardware and software divisions. Most of HP's sales come from PCs, and the rest comes from printers and imaging services.
Lenovo's key opportunities
Last quarter, 70% of Lenovo's revenue came from its PCSD (PC and Smart Devices) division -- which sells of PCs, laptops, 2-in-1s, convertible devices, and tablets. 18% came from its Mobile business, which sells Lenovo and Motorola smartphones, and 9% came from its Data Center business.
Its PCSD revenue rose 2% annually during the quarter, thanks to rebounding demand for high-end laptops and 2-in-1 devices, but its Mobile and Data Center revenues respectively fell 23% and 20%. That weakness -- which caused its total revenues to fall 6% -- was caused by tough competition in the Chinese smartphone market and sluggish enterprise spending on low-end servers.
To address that slowdown, Lenovo is expanding its mobile business to higher growth markets like India. To strengthen its data center business, Lenovo is revamping its product line, expanding its sales teams, and forging new enterprise partnerships.
HP's key opportunities
65% of HP's revenue came from PC sales last quarter, and the rest came from printers and imaging services. Its PC sales rose 10% annually, thanks to rising demand for higher-end laptops and convertibles, but printer sales dipped 3% due to lower demand for commercial hardware and supplies. Despite that hiccup, HP's total sales still rose 4%.
Looking ahead, HP's PC sales will likely keep improving on more user upgrades. As for the printing business, HP believes that new product like mobile device printers (like the Sprocket) and industrial-class 3D printers will get its growth back on track. Its planned acquisition of Samsung's printing unit should also help the business scale up and boost its overall market share.
Which company pays higher dividends?
At first glance, Lenovo's trailing yield of 5.2% looks much better than HP's 3% yield. However, Lenovo's yield was lifted to an all-time high by the stock's 17% decline over the past year.
Like many Chinese companies, Lenovo pays semi-annual dividends which are declared every half year. Lenovo has only paid dividends since 2014, and it only raised its payout once in 2015. The dividend, which is paid in Hong Kong dollars, could also fluctuate based on exchange rates for ADR shareholders in the U.S. HP already hiked its quarterly dividend once last year, and will likely continue the "old" HP's tradition of annual dividend hikes.
Lenovo spent 47% of its earnings and 75% of its free cash flow (FCF) on dividends over the past 12 months. HP spent just 33% of its earnings and 23% of its FCF on its dividends. HP's lower payout ratios indicate that it has more room to raise its dividend, but Lenovo probably won't slash its payout anytime soon.
Which stock is the cheaper play?
Lenovo and HP both belong to the diversified computer systems industry, which has an average P/E of 13. Lenovo and HP both trade at 12 times trailing earnings. However, Lenovo's price-to-sales ratio of 0.2 is much lower than HP's P/S ratio of 0.6.
Analysts expect Lenovo's revenue to fall 4% this year before rebounding 3% next year. HP's revenue is expected to rise 1% this year and dip 1% next year. That sluggish growth can be attributed to the gradual recovery of PC sales -- fueled by demand for premium laptops, convertibles, and 2-in-1s -- being offset by slower growth in other businesses, like Lenovo's Mobile and Data Center businesses and HP's printing business.
On the bottom line, Lenovo posted a net loss in fiscal 2016, but it's expected to return to full-year profitability this year, which ends on March 31. Its earnings are expected to stay roughly flat in 2018. HP's earnings are expected to rise less than 1% this year, but grow 4% next year on stronger sales of PCs and the aforementioned changes to its printing business.
The winner: HP
Lenovo might have the higher yield, but its poor price performance, exposure to the saturated mobile and data center markets, higher payout ratios, and inconsistent dividend hikes all make it a less desirable income play than HP. HP has a lower yield, but its balanced growth and predictable dividend hikes make it a better overall pick in my book.