Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Forget HP, IBM Is a Better Dividend Stock

By Leo Sun - Dec 2, 2019 at 11:23AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Big Blue boasts a bigger dividend, a better diversified business, and a clearer path towards a sustainable recovery than HP.

HP ( HPQ -0.24% ) and IBM ( IBM 1.66% ) are both considered slow-growth stalwarts of the tech industry, and are generally owned for stability and income instead of growth. However, investors who are mainly interested in dividends should consider Big Blue a better income play than HP, for three reasons.

A higher yield with a more generous payout ratio

HP pays a forward yield of 3.5%. That equals $0.70 per share in annual dividends, but only 31% of its non-GAAP EPS forecast for 2020. It's raised that payout every year since its split with Hewlett Packard Enterprise ( HPE 1.20% ) in late 2015.

A canvas bag labeled "dividends".

Image source: Getty Images.

IBM pays a forward yield of 4.8%, which equals $6.48 per share in dividends per year. That equals 50% of its non-GAAP EPS forecast for the year. It's hiked that payout annually for 24 straight years, which puts it on track to become a "Dividend Aristocrat" -- a member of the S&P 500 that's raised its dividend for at least 25 straight years -- in 2020. Therefore, IBM's higher yield, higher payout ratio, and longer streak of dividend hikes all make it a more appealing income play than HP.

A better diversified business

HP generates its revenue from two core businesses: personal systems (PCs and workstations) and printers (hardware and supplies). The personal systems unit, which generated 68% of its revenue last quarter, remains stable.

However, the ongoing decline of its printing unit -- which is struggling with weak sales of hardware and supplies -- is offsetting that growth. A major sore spot is its higher-margin supplies unit, which is losing ground to cheaper generic ink and toner suppliers.

IBM's business is split into five main units: cloud and cognitive software (29% of its revenue last quarter), global business services (23%), global technology services (37%), systems (8%), and global financing (2%). The cloud and cognitive unit, which includes is cloud services and Red Hat, is its core growth engine.

IBM's other businesses (especially systems, which is in a cyclical downturn) are weaker, and frequently offset the stronger growth of its newer businesses. Nonetheless, it continues to make progress in cloud platforms and services, which accounted for 27% of its revenue last quarter, and its growth could improve as cyclical orders of systems accelerate and it reaps the revenue-boosting benefits of its Red Hat acquisition.

IBM's z14 mainframe.

Image source: IBM.

At first glance, HP and IBM both seem weighed down by weaker businesses. But IBM has more irons in the fire, while HP's earnings growth remains shackled to its sickly printing supply business.

A stronger long-term outlook at a similar multiple

Over the past 12 months, HP's stock slipped 10% as IBM's stock rose 15%.

The bulls likely favored IBM because its cloud business was still growing, the Red Hat acquisition would boost its revenue and expand its ecosystem, and its systems sales would likely improve with the start of a new product cycle. That's why analysts expect IBM's revenue and earnings to improve 3% and 4%, respectively, next year.

Meanwhile, the bears pounced on HP because the weakness of its printing unit was overwhelming the stable growth of its PC business. The abrupt departure of its CEO and a hostile bid from Xerox ( XRX ) caused even more confusion. Analysts expect HP's revenue to decline 1% next year as its earnings rise less than 1%.

Both stocks look fundamentally cheap: IBM trades at just ten times forward earnings, and HP has a slightly lower forward P/E ratio of nine. But after taking into account IBM's higher yield, better diversified business, and clearer growth path, it's easy to see that Big Blue is a stronger dividend stock than HP.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$118.84 (1.66%) $1.94
HP Inc. Stock Quote
HP Inc.
$37.55 (-0.24%) $0.09
Xerox Corporation Stock Quote
Xerox Corporation
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
$15.17 (1.20%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/04/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.