HP (HPQ) stock hasn’t performed remarkably this year. However, the company has been regularly rewarding shareholders through dividends and share buybacks.
HP’s cash flow
At the end of fiscal 2019’s fourth quarter, HP’s cash and cash equivalents were $4.5 billion, down from $5.2 billion a year ago. HP’s long-term debt was $4.78 billion, and had risen YoY (year-over-year) from $4.52 billion. HP repaid debt of around $76 million in the quarter.
In the fourth quarter, its operating cash flow fell 39% YoY to $0.6 billion, and its free cash flow fell 53% YoY to $0.4 billion. During the fiscal year, the company’s cash flow from operations rose around 3% YoY to $4.7 billion. Its free cash flow, however, fell 4% YoY to $4.0 billion. Despite the decline, HP returned around 85% of its free cash flow to shareholders in fiscal 2019, compared with 83% and 69% in fiscal 2018 and fiscal 2017, respectively.
HP’s share buybacks and dividends
In the fourth quarter, HP returned 178% of its free cash flow to shareholders. The company spent around $461 million to repurchase around 25 million shares. HP also paid a cash dividend of $0.1602 per share (or $236 million in total) in the fourth quarter.
In fiscal 2019, HP repurchased approximately 118 million shares for $2.4 billion and paid around $1 billion in cash dividends. Regular share repurchases boost a company’s EPS. In the fourth quarter, HPQ’s adjusted EPS grew 11.1% YoY to $0.60 due to margin growth and a lower share count backed by share buybacks. In Q4, HPQ’s revenue increased by 0.3% YoY to $15.4 billion. The company’s YoY revenue growth has slowed for seven straight quarters due to soft sales in its printing businesses.
HP hikes dividend
On November 14, the hardware company announced a quarterly dividend hike of about 10% for the quarter, to $0.1762 per share from $0.1602. The new dividend is set to be paid on January 2, 2020, to stockholders of record on December 11. The hike brings its annual dividend to $0.7048 per share. As of yesterday, HP had a dividend yield of 3.47% and a payout ratio of 31.46%.
HP has a higher dividend yield than peers Hewlett Packard Enterprise (HPE), Juniper Networks (JNPR), NetApp (NTAP), and Cisco Systems (CSCO), whose yields are 3.02%, 3.14%, 3.03%, and 3.00%, respectively. Cisco has also been rewarding shareholders with dividend hikes and share buybacks, and has increased its dividend payout for the last eight years. Last month, HPE hike its dividend by about 7%.
HP’s stock performance
HPQ stock was 0.19% down yesterday and closed at $20.49. Meanwhile, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite fell 0.6%, 0.64%, and 0.67%, respectively.
At Monday’s closing price, HP’s market capitalization was around $30 billion. It closed 14.9% below its 52-week high of $24.09, and 28.6% above its 52-week low of $15.93. Year-to-date, HPQ stock had risen only 2.7% as of yesterday. In comparison, the S&P 500 had gained around 28.5%.
HP stock has risen this year despite the company’s printing businesses struggling due to weak demand in the digital era. On a constant-currency basis, HP’s printing revenue fell 5% YoY in the fourth quarter, and its supplies revenue fell 7% YoY.
HP faces merger pressure from Xerox
HP is also facing pressure from Xerox Holdings (XRX), which wants to buy HP. On November 5, Xerox valued HP at $33.5 billion. Xerox planned to pay $17 per share in cash to HP shareholders and the rest in stock for the deal. However, the PC maker has rejected Xerox’s proposal twice, despite Xerox’s threats to make the acquisition bid hostile.
While Xerox is trying to convince HP shareholders to accept the merger, HP’s board doesn’t seem ready for the deal. Activist investor Carl Icahn, who has a 4.24% stake in HP, is also pushing HP for the merger.
The combined company could deliver significant revenue and cost synergies for both companies. Although HP agrees that the merger could generate opportunities, HP’s board believes that the $22 per share takeover offer is not in shareholders’ interest. The hardware company has therefore rejected the proposal, stating it would undervalue HP. CNBC host Jim Cramer also believes the HP-Xerox deal wouldn’t be viable.
HP’s 2020 outlook
The company anticipates improvement and better visibility in fiscal 2020. HP has forecast adjusted EPS of $0.53–$0.56 in the first quarter of fiscal 2020, while analysts expect its EPS to grow 4.5% YoY to $0.54. In fiscal 2020, HP expects EPS of $2.24–$2.32, and analysts expect its EPS to grow 0.83% YoY to $2.26.
Analysts expect HP’s sales to fall. They expect HP’s revenue to fall by 0.81% YoY to $14.6 billion in Q1, and 1.4% YoY to about $58.0 billion in fiscal 2020.
HP is working toward boosting its personal systems segment, cutting costs, and become a profitable company. HP has been restructuring to reduce around 7,000–9,000 employees by fiscal 2022. The move could cut costs by about $1 billion annually.
However, HP’s PC business may suffer due to Intel’s (INTC) chip supply constraints. During Q4, HP management feared that Intel’s supply issues would hurt the PC business in the first half of 2020.
Analysts’ recommendations for HP stock
Of the 15 analysts covering HP, 12 suggest “hold,” two suggest “buy,” and one suggests “sell.” Their average target price of $20.52 for HP implies a 2.3% premium based on its December 30 closing price of $20.49.