How Investors Who Buy Hewlett-Packard Could End Up With A 10% Yield

| About: HP Inc. (HPQ)

While many investors seem to loathe Hewlett-Packard (NYSE:HPQ) shares due to what some feel is a boring company product line and a lack of significant revenue growth, a new class of investors might soon be taking more notice of the stock and buying it up, while it is still a bargain. It trades for less than 5 times earnings and for close to book value, which is $16.03 per share. Here is why income investors should be considering the stock now, and how those who buy at current levels could end up with a yield of more than 10%, over time:

At HP, the quarterly dividend was 8 cents for a number of years, but since early 2011, it has seen a dramatic rise to 13.2 cents per quarter. That's about a 70% rate of growth in the dividend, in just the past couple of years. Around June of 2011 and 2012, Hewlett Packard has raised the dividend so there appears to be a clear focus to return capital to shareholders. Just to compare, in the past couple of years, Microsoft (NASDAQ:MSFT) has raised the dividend from 16 cents (in June 2011) per quarter to 20 cents today. That's about a 25% rate of growth, which is not bad, but nowhere near HP's almost 70% growth rate.

With the annual dividend currently at 53 cents per share, the yield is now at about 3%. That is already better than average, especially for a tech stock. But what is even more interesting is that based on earnings estimates, HP has significant room for further dividend increases. With annual earnings estimates of about $4 per share and the dividend at just 53 cents, the payout ratio is just around 12.5%. Compare that to Intel (NASDAQ:INTC) which has become a dividend favorite in the tech sector and it's easy to see why income investors might start snapping up HP shares. Intel trades for just over $24 per share and it offers a 90 cent annual dividend which works out to a 3.6% yield. Intel's earnings estimates are just about $2 per share, and that puts the payout ratio at a much higher level of almost 50%, versus about 12.5% for HP. If Hewlett Packard were to gradually raise the dividend to a payout ratio that is similar to Intel's, it would pay about $2 per share and that would give investors buying now a yield of over 10%! Like Intel, HP is a more mature tech company, and investors who recognize the early signs of a focus on annual dividend increases and the financial ability for a much higher payout ratio could end up with big dividends and capital appreciation in the coming years.

Here are some key points for HPQ:
Current share price: $17.42
The 52 week range is $16.77 to $30
Earnings estimates for 2012: $4.06 per share
Earnings estimates for 2013: $4.20 per share
Annual dividend: 53 cents per share which yields 3%

Data is sourced from Yahoo Finance. No guarantees or representations
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not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial

Disclosure: I am long HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.