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Forget Hewlett-Packard Company: Here Are 2 Better Dividend Stocks

By Timothy Green - Mar 28, 2016 at 4:45PM

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Both HP and Hewlett Packard Enterprise sport dividends, but there are far better options for dividend investors.

Image source: HP.

Neither of the two companies that emerged from the split of Hewlett-Packard last year, HP (HPQ -2.78%) or Hewlett-Packard Enterprise (HPE -2.26%), are particularly attractive dividend stocks. HP, which sells personal computers and printers, sports a lofty 4.1% dividend yield, but revenue and profits are slumping. During the first quarter, PC sales fell 13% year over year, and printer sales tumbled 17%. Growth prospects are slim, and while the dividend is easily covered by earnings, a 12% decline in non-GAAP EPS during the first quarter certainly doesn't instill confidence in the company.

Meanwhile, Hewlett-Packard Enterprise, which focuses on enterprise hardware, software, and services, has a far more attractive business, but a dividend yield of just 1.25% makes the stock a nonstarter for dividend investors. Hewlett-Packard Enterprise may be able to grow its dividend faster than HP, given the growth potential of its various businesses, but the yield is just too meager.

Thankfully, there are a couple of other large technology companies, International Business Machines (IBM -0.05%) and Cisco Systems (CSCO -0.09%), that offer far better dividends than either Hewlett-Packard company.

International Business Machines

Image source: IBM.

IBM has also been suffering from slumping revenue and profits. During 2015, IBM's revenue declined by 12%, while non-GAAP EPS slumped 10%. The company is currently transitioning its business, shifting resources toward high-growth, high-value opportunities. IBM's strategic imperatives, which include analytics, cloud, mobile, social, and security, collectively grew by 26% during 2015 on an adjusted basis, accounting for 35% of total revenue. The rest of the company, however, is shrinking.

IBM's revenue woes are not nearly as bad as they seem. Because IBM is a global company, with revenue recorded in various currencies, the strong U.S. dollar has negatively affected IBM's results. Adjusted for both currency and divestitures, IBM's revenue in 2015 declined by just 1%, a far less dire result. Earnings are affected as well, although IBM doesn't disclose the exact impact. Needless to say, the headline numbers greatly exaggerate the severity of IBM's problems.

The good news for dividend investors is that the dividend is well covered by IBM's earnings, even at depressed levels. IBM expects non-GAAP EPS of at least $13.50 in 2016, putting the payout ratio at about 38.5%. This leaves plenty of room for dividend growth, even if earnings growth takes longer-than-expected to return. With 20 consecutive years of dividend increases in the books, IBM is very likely to announce a dividend increase in April.

With a dividend yield of about 3.5% and plenty of room for dividend growth, IBM is a far better dividend stock than HP or Hewlett-Packard Enterprise.

Cisco Systems

Image source: Cisco.

Hewlett-Packard has long been a distant second in the Ethernet switch market, behind dominant leader Cisco. During the fourth quarter of 2015, Cisco enjoyed a 59.2% share of the Ethernet switching market, dwarfing Hewlett-Packard Enterprise's 9.2% share. For Cisco, switching is its largest segment, accounting for 29.4% of revenue during the company's latest quarter. But Cisco is moving toward becoming a provider of solutions, not just a seller of hardware, and while the company is unlikely to return to the heady growth of the past, Cisco certainly isn't standing still.

Major growth areas for Cisco include data center, where the company's line of UCS servers have been growing rapidly in recent years, minus a hiccup during the latest quarter. Cybersecurity is also a significant opportunity for the company, and Cisco has been making a slew of acquisitions in an effort to grow the business. According to Cisco, the cybersecurity market is overcrowded, with the typical large enterprise having over 50 separate security vendors. Consolidation is inevitable, and Cisco is aiming to be one of the major players that emerges.

Turning to the dividend, Cisco sports a yield even higher than that of IBM thanks to a recent dividend hike. Along with its latest earnings report, Cisco announced a 24% increase in its quarterly dividend, bringing the stock's yield up to about 3.7%. Cisco's payout ratio is higher than that of IBM, about 47% based on non-GAAP numbers and nearly 60% based on GAAP numbers, meaning that future dividend growth is unlikely to be much faster than earnings growth. But a high yield, dominant core businesses, and the potential for long-term growth makes Cisco a dividend stock to own.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$141.12 (-0.05%) $0.07
HP Inc. Stock Quote
HP Inc.
$31.87 (-2.78%) $0.91
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$42.60 (-0.09%) $0.04
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
$12.96 (-2.26%) $0.30

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

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