Why HP Is A Top Tech Stock Today

In the vast tech industry there are companies with many different business models. The most famous ones are those that have strong growth track records that make products or services we interact with often, such as Netflix or Amazon. These higher-growth tech companies are oftentimes trading at high valuations, though, which results in less-then-stellar total return outlooks.

It makes sense to look for tech companies that might look less outstanding at first sight, but that can still offer compelling total returns, through a combination of dividends, some earnings growth, and multiple expansion potential. HP Inc. (HPQ) is one such company. The printer business is not a high-growth industry, and it is less shining compared to cloud computing or social media. HP could nevertheless offer strong total returns over the coming years, which is why we take a closer look at this company, which is one of the top 10 tech stocks to buy right now.

Company Overview & Growth Outlook

HP Inc. was created when Hewlett-Packard was split into HP Enterprise (HPE) and HP Inc. HP now is focused on the printing and the personal computing industries. These are no high-growth businesses, but HP has a large revenue base, generating almost $60 billion in sales over the last year.

HP’s most recent quarterly results were announced on August 22. During the fiscal third quarter the company grossed revenues of $14.6 billion, which was relatively flat year over year. The company managed to generate organic revenue growth of 2% during the quarter, but adverse forex rate movements offset most of that. HP nevertheless managed to generate earnings-per-share of $0.58 during the third quarter, which represents a year-over-year growth rate of 12%. This is a very solid growth rate for a company that is active in a low-growth industry, such as HP.

We believe that HP won’t be able to keep its earnings-per-share growing at a double digit pace during the coming years, as HP’s core markets, personal computing and printing, face some headwinds. Consumers are shifting their screen time to mobile devices, and there is some pressure on consumers and businesses to operate in a less paper-intensive way, which is a negative for HP’s printing business. As one of the largest players in these industries, HP will continue to benefit from scale advantages and its global reach, and HP has some growth potential in new technologies such as 3D printing. HP also generates massive amounts of cash, and returns a majority of that cash to its owners via buybacks and dividends. Thanks to its industry leadership position and a strong pace of buybacks, we believe that a long term earnings-per-share growth rate of ~5% is achievable.

HP Offers A High Dividend Yield And Trades At A Low Valuation

Based on its current share price, HP offers a dividend yield of 4.0% to its owners. This dividend is very well covered by both cash flows and net profits, thus the risk of a dividend cut seems very small. The stock’s current yield is more than twice as high compared to what investors can get from the broad market. On top of the high dividend yield, investors should also benefit from multiple expansion over the coming years.

Based on our forecast for earnings-per-share of $2.20 during 2019, HP trades at just 7.3 times this year’s net profits. An overly high multiple would not be justified for a low-growth company, but we see upside potential towards an earnings multiple of 9.5, which could add roughly 5% to HP’s annual returns from the current level. Together with the dividend yield of 4%, and our long-term growth estimate of 5%, HP could generate annual total returns of ~14%.

Investor Takeaway

HP is not a high-growth company, and it is not operating in a spectacular industry. The company nevertheless should be able to generate compelling total returns over the coming years, primarily due to its high dividend yield and very low valuation. This makes the company one of the more attractive tech stocks right here, in our view.

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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Beating Buffett 4 years ago Member's comment

Interesting, I should give $HPQ a better look - I had written them off years ago.