HP Inc (HPQ): Solid Income Investment Despite Challenging Quarter


  • HPQ is a dependable choice for income investors, offering a dividend yield of around 3.35%.
  • The company’s solid free cash flow and low valuation multiples make it an attractive value proposition.
  • While facing challenges, HPQ maintained strong margins and reaffirmed its earnings and cash flow guidance.
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OHP Inc (HPQ) is not a growth stock that might excite investors, but it is a reliable choice for income investors. While the company’s business and outlook may not be overly positive at the moment, it remains solid with strong free cash flow and a dependable dividend. The dividend yield stands at around 3.35%, which is a decent return compared to the broader market represented by the S&P 500 (SPY). Moreover, HPQ offers a value proposition as its shares are trading at a relatively low multiple of 9 times its earnings, making it half as cheap as the average S&P 500 stock while providing a higher yield.

Despite a challenging quarter and reduced demand from both consumers and businesses, there are positive aspects in HPQ’s report. Although revenue declined by 21.7% to $12.91 billion compared to the previous year, the company managed to maintain strong margins. The Personal Systems unit experienced a significant 29% drop, but it was somewhat offset by a more modest 5% decline in the Printing segment. Overall, while HPQ faces challenges, it has the potential to outperform in the latter half of the year, supported by favorable guidance compared to some competitors.

Despite an expected contraction in margins, HP Inc (HPQ) delivered better-than-anticipated results. The company reported an adjusted operating margin of 8.7%, down slightly from the previous year but 60 basis points better than expected. This resulted in a solid bottom line figure of $0.80 per share, surpassing the consensus estimate by 1000 basis points, according to Marketbeat.com.

While HPQ did not revise its revenue figures, it reaffirmed its earnings and cash flow guidance. The company expects its adjusted earnings per share to align with the consensus estimate for the second quarter and surpass it for the full year. Furthermore, HPQ anticipates free cash flow for the fiscal year to range between $3 billion and $3.5 billion. This is positive news for income investors as it indicates the company’s ability to maintain and potentially increase its dividend distribution

In the second quarter, HPQ generated $0.6 billion in net cash from operating activities, with $0.5 billion in free cash flow. The dividend payout ratio based on free cash flow stood at 60%, which is considered safe and sustainable. However, for the full year, the free cash flow payout ratio improves to approximately 35%, leaving ample room for potential dividend increases.

Although there has been a year-over-year reduction in cash on the balance sheet, this is offset by a decrease in current liabilities and long-term debt, mitigating any concerns. Analysts generally support HP Inc, with recent updates including upgrades to Buy equivalents and price target increases. The stock’s price action experienced a decline following the Q2 report but appears to have found support at the $29 level, indicating a sideways, range-bound trading pattern. This support level is expected to hold unless there are significant negative changes in the company’s outlook.

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