Marc is catching up from a busy month promoting his new book Get Rich With Dividends and a busy couple of days spent networking with Oxford Club Members at last week’s Investment U Conference in St. Petersburg, Florida.
He’ll be back next week, but the Safety Net must go on. Last week, Jim asked us to take a look at the dividend safety of Hewlett-Packard (NYSE: HPQ).
[ad#Google Adsense 336×280-IA]A former technology titan, Hewlett-Packard has been a volatile ride for shareholders over the last 15 years.
However, regardless of the performance of the business and share price, Hewlett-Packard’s investors have been able to count on one thing: the dividend.
For years, Wall Street analysts and technology bloggers alike have proclaimed the death of the PC.
“I told you so!” shouts one technology industry rag.
“PC sales fall more than expected!” bellow the market research firms.
Not surprisingly, Hewlett-Packard is a stock analysts love to hate.
It’s gotten so bad that even the upgrades sound negative. Earlier this month, one Wall Street firm upgraded Hewlett-Packard to a “Buy,” but not because the analyst believed in the company’s business fundamentals. Oh no. He upgraded it because he doesn’t see how the share price can fall much further. Yet here’s why Marc (and all of us at Wealthy Retirement) doesn’t pay much attention to the Wall Street “experts.”
Despite the negativity, the company’s five-year turnaround plan is well underway. For example, Hewlett-Packard recently dipped its toe back into mergers and acquisitions with a $2.7 billion acquisition of wireless networker Aruba Networks (Nasdaq: ARUN).
In addition, investors expect the company to spin off its printer and PC business later this year. This is an important step as the tech firm continues its transformation into a cloud-computing and enterprise company. The cost savings projected by management will allow Hewlett-Packard to operate more competitively in its respective markets.
Of course, there’s also the dividend. As you know, popularity doesn’t pay dividends, but cash flow does. And Hewlett-Packard generates plenty of free cash flow.
In 2014, Hewlett-Packard’s free cash flow grew to $8.48 billion and has grown 4% over the last three years. Also last year, the company returned approximately $1.2 billion to shareholders in dividends, resulting in a comfortable payout ratio (based on free cash flow) of 14%.
On the downside, management reduced the company’s 2015 earnings and revenue guidance, citing the strong U.S. dollar.
This year’s 53% decline in estimated cash flow doesn’t look too pretty either.
But with a forward 2015 payout ratio of just 28.54%, I’m not concerned.
Add in Hewlett-Packard’s sterling history of no cuts since it initiated the dividend in 1992 and the fact it has averaged double-digit annual raises for the last four years, and you have a very safe dividend payer.
Despite Hewlett-Packard’s lengthy turnaround and unpopularity on Wall Street, the dividend looks rock-solid.
Dividend Safety Rating: A
— Kristen Haughk
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Source: Wealthy Retirement