Higher Dividend, Same Management

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a recent report on Hewlett-Packard (NYSE: HPQ), I discussed the falling sales of the printer and PC giant. The discussion was focused on the importance of the impending investors meeting and the move to replace the current management. HP’s existing management has been responsible for approving some horribly misguided acquisitions and squandering shareholder wealth. The board has once again escaped by a narrow margin and continues to call the shots on behalf of HP’s shareholders.

The company has also increased its dividend by 10%, which is way below what investors would have wanted. It made more sense for HP to return as much as possible to shareholders rather than waste the capital on useless acquisitions. At these levels the company dividend seems sustainable in the short run, but long term weaknesses in the PC and Printer segment are a threat to HP’s operating cash flows. Microsoft (NASDAQ: MSFT) and IBM (NYSE: IBM) have lower OCF yields as compared to HP, but better long term prospects due to strong enterprise presence and well diversified business models.

Proxy Fight

The market was expecting that some major bad decisions by the current board would result in stern action by the shareholders. The move to replace current directors was initially made by the proxy advisory firm ISS. The firm had recommended that shareholders of HP should consider replacing the Chairman Ray Lane and two directors name G. Kennedy Thompson and John Hammergren. The recommendation was made due to the inability of the three individuals to stop the company from making a number of misguided acquisitions, including Autonomy. 

The sacking was also supported by Glass Lewis and New Yorks’s public pension fund. Glass Lewis had also added Rajiv Gupta and Marc Andreessen to the list of individuals they wanted removed from the HP board. The company has been a long time critic of these individuals for their role in the election of the HP’s previous CEO, Leo Apotheker. The NY pension fund doesn’t hold a lot of sway in terms of share holding, but was being considered a major influence on the vote. The fund holds approximately 5.5 million shares of HP, which are a worth a total of approximately $130 million.

The Vote

Despite market expectations of a management change, the HP’s board members have managed to hold on to their seats for the time being. The vote still showed the shareholder displeasure of its importance as a number of major directors saw mammoth declines in their shareholder popularity. Ray Lane was once again elected as the chairman with just 58.88% of the vote, as compared to his 96% sweep last term. Hammergren  saw a mammoth decline in his popularity from 81% last year to only 53.91% this time around. Thompson and Andreessen also saw a major decline in their popularity after being singled out by proxy advisory firms. Thompson’s vote decline from 81.2% to only 55.15%, and Andreessen’s shareholder trust was reduced to 69.77% from 82% last year. Rajiv Gupta and the current CEO Meg Whitman are still in the shareholder's good books and were voted in with 80.25% and 98%, respectively.

Dividend Hike

In a recent move the company management has increased the technology giant’s dividend to 14.52 cents per share. The change will be effective from 2013 May and investors would still receive a 13.2 cents dividend on April 2013. The company currently holds cash and short term investments worth $12.6 billion and total liabilities worth $83.4 billion. The dividend hike was much less than expected by the industry. Investors were looking for a bigger increase in the dividend to ensure that money was returned to shareholders rather than spent on pointless acquisitions.

HP is still behind its peers when it comes to a dividend yield. The current dividend hike brings the company’s dividend yield to approximately 2.5%. Microsoft is offering a dividend yield of 3.2%, and IBM a yield of 1.6%. On the other hand, IBM has appreciated by approximately 84% in the last five years. If we look at sustainability the dividend yield of HPQ seems to be the least vulnerable based on operating cash flows.

<table> <thead> <tr><th> <p><strong>Company </strong></p> </th><th> <p><strong>OCF Yield</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>HPQ</strong></p> </td> <td> <p>22%</p> </td> </tr> <tr> <td> <p><strong>Microsoft </strong></p> </td> <td> <p>13%</p> </td> </tr> <tr> <td> <p><strong>IBM</strong></p> </td> <td> <p>8.22%</p> </td> </tr> </tbody> </table>

As the calculations above shows, HP has the highest operating cash flow yield, which shows that their operation have the best ability to sustain its dividend. On the other hand the situations of its two largest segments, Printer and PC, are pretty bleak. While Microsoft has a strong foothold in the enterprise segment, which will ensure their operating cash flows are sustainable, HP is more vulnerable to falling OCF due to declining sales in its primary segments.

Therefore, despite a high OCF yield the company should not be considered a top dividend pick. HP will undergo some major restructuring, and it remains to be seen if it can successfully diversify itself away from just being a PC and printer company. At these levels IBM and Microsoft are much better dividend stocks due to most sustainable business models and chances of capital appreciation. 

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