When investors are looking for long-term dividend plays, they often buy blue chip stocks in the consumer staples, financial, pharmaceutical, energy, and utilities sectors. Fewer investors gravitate toward tech stocks -- presumably because they're mostly bought for growth instead of stable dividends. That's why many tech stocks were crushed last year when rising interest rates drove investors toward more conservative investments.
Yet there are still plenty of blue chip tech stocks which provide the same stability, predictable returns, and high yields as the more popular dividend plays. Let's take a closer look at two of them -- IBM (IBM -1.05%) and HP (HPQ -0.46%) -- and see if either blue chip tech stock is worth buying as an income play in this turbulent market.
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IBM is trying to stay in the cloud and AI race
IBM had been struggling with years of revenue declines when its cloud chief Arvind Krishna took the helm as its new CEO in April 2020. Krishna's first order of business was to divest its slow-growth managed infrastructure services unit as Kyndryl. That spin-off, which was completed in November 2021, removed a dead weight on its top line and freed up more resources for the expansion of its hybrid cloud and AI businesses.
Instead of pitting itself against public cloud giants like Amazon and Microsoft, the "new" IBM believes it can expand its open-source software subsidiary Red Hat to carve out a defensible niche between the public and private cloud markets. These hybrid cloud and AI services are compatible with a broad range of platforms, and they can crunch the data which flows between public and private clouds to help organizations make smarter data-driven decisions.
IBM's streamlining efforts enabled all three of its core businesses -- software (41% of its revenue in 2022), consulting (32%), and infrastructure (25%) -- to grow last year. As a result, its revenue and adjusted EPS rose 6% and 15%, respectively. For 2023, analysts expect its revenue and adjusted EPS to both grow about 3% -- even as the macro headwinds broadly throttle enterprise spending on big software deals.
After navigating these near-term challenges, Krishna expects IBM's annual revenue to grow by the mid-single digits over the long term. That growth rate might seem anemic, but it represents a big improvement from its persistent revenue declines over the past decade. IBM still has a lot to prove, but its stock looks cheap at 14 times forward earnings and it's rewarding its long-term investors with a generous forward yield of 5%.
HP needs to overcome its latest cyclical slowdown
As one of the world's largest producers of PCs and printers, HP operates a cyclical business. Its sales of new PCs surged throughout the pandemic as more consumers upgraded their laptops and desktops for remote work, online classes, and high-end games. They also bought more printers to print documents at home. That expansion of its consumer business offset the slower growth of its commercial business, which faced tough headwinds as businesses shut down throughout the crisis.
But after the pandemic passed, the growth of its consumer business stalled out as people bought fewer PCs and printers. Meanwhile, the inflation, rising rates, and other macro headwinds cut short the post-pandemic recovery of its commercial business. Its sales of higher-margin printing supplies also remained weak amid stiff competition from generic competitors.
Those challenges caused HP's revenue and adjusted EPS to decline 1% and 7%, respectively, in fiscal 2022 (which ended last October). It doesn't expect those headwinds to dissipate anytime soon, but it plans to streamline its portfolio and lay off about 7%-10% of its current workforce by the end of fiscal 2025 to boost its EPS. It's also reducing its buybacks to free up more cash for the expansion of its higher-growth hybrid work, gaming, industrial graphics, and 3D printing product lines.
But for fiscal 2023, analysts still expect HP's revenue and adjusted EPS to drop 14% and 17%, respectively, as the PC and printing markets bottom out. It hasn't hit the trough of that cyclical decline yet, but its stock looks dirt cheap at 9 times forward earnings and pays an attractive forward dividend yield of 3.2%.
The better buy: IBM
IBM and HP are both stable long-term investments, but IBM is a better buy than HP right now for three simple reasons. First, IBM is growing at a steady rate instead of searching for a cyclical bottom like HP. Second, IBM is providing a clearer roadmap for its long-term growth (in the hybrid cloud and AI markets) than HP, which is mainly focusing on cutting costs to boost its profits instead of building new growth engines. Last but not least, IBM pays a much higher dividend yield than HP.
