HP's Ambitious Transition to Dividend Stock

| About: HP Inc. (HPQ)

Yesterday was a monumental day for Hewlett-Packard (NYSE:HPQ) investors. After decades of waiting, the new CEO has hinted that the future looks bright for those who want to get their hands on the business profits in the form of a dividend.

HP announced that it would increase its dividend for the first time in over a decade. And it will do so with flair, as the bump is 50% higher than where it has been-- to .12 cents per share from .08 cents. More importantly, Cathie Lesjak, HP's Chief Financial Officer, stated that HP plans on increasing the dividend by a double-digit percentage every year. So the current yield goes from .80% to 1.2%, and then HP plans to raise that by double digits every year.

With HP not gaining momentum as quickly as other companies, can it truly afford to raise its dividend at this kind of a rate going forward? Also, looking at the company's stock price, isn't one to conclude that the company executed terribly this past decade?

On December 31, 1999 the stock closed at $56.88. 11 years later it closed at 42.10 for a loss of 26%. Not great. In reality though, the company has performed extremely well in this time, despite the fact that the stock price has gone nowhere. That says more about investors' analytical ability back in 1999, in contrast to HP's ability to execute on its plan. Back in 1999, if the company decided to pay out all of its free cash flow in the form of a dividend, it would only have been able to offer up a 2.9% yield. As I have stated in other similar articles, investors back then would have been better off buying the 10 year treasury which yielded 6.5%. A boring 10 year back then was 124% more attractive from a yield standpoint.

Today, HPQ has enough cash flow to offer a 10.16% yield if it chose to pay all of its free cash flow out as a dividend. With the 10 year yielding only 3.37%, HPQ is 201% more attractive from a cash flow yield standpoint. With those numbers in mind and the current yield sitting at a declared 1.2%, raising the dividend by double digits is very affordable. Assuming its business stays flat for the next 20 years (my assumption is that the company will actually grow), it would be yielding nearly 7.8% on money invested today. So for a dividend growth investor with a long term time horizon, investing in shares today can potentially yield almost 8% on that original investment each and every year. And this assumes no growth.

If HP's dividend growth rate ends up being 15% (cash flow has increased at 19.5% a year for the past 5), then in 15 years the yield on investment-- based on today's prices-- would be just under 10%. Again, this assumes no growth. Regardless of where the economy heads over the intermediate term, HP should have plenty of cash flow over the next decade plus, to really shower the shareholders with those healthy business profits.

Disclosure: I am long HPQ.

Additional disclosure: Most client portfolios are long HPQ with an initial 0.5% weighting.