Hewlett-Packard: Bonds Offer Yield And Uncertainty

| About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) went down nearly 13% today after announcing its 2013 outlook. The question on many investors' minds is can Meg Whitman, former CEO of eBay, turn HP around.

...chief executive officer Meg Whitman outlined progress made over the past year to stabilize the business and lay the foundation for a multi year turnaround.

The company is positioned to extend its leadership into the major trends driving IT investment -- cloud computing, information optimization and data security.

The "progress" cited was not enough to ease investors' concerns.

Take a look at how Hewlett-Packard bonds currently stack up to Microsoft (NASDAQ:MSFT), eBay (EBAY), Dell (NASDAQ:DELL) and Computer Sciences Corp. (NYSE:CSC):

credit rating price yield
Hewlett-Packard Co Glbl Nt 6% 2041, Make Whole Call (cusip: 428236BR3) not call protected, sinking fund protection A3/BBB+ 106.87 5.52%

Hewlett-Packard Co Glbl Nt 3.75% 2020, Make Whole Call (cusip: 428236BF9) not call protected, sinking fund protection

A3/BBB+ 100.37 3.69%
Hewlett-Packard Co Sr Nt 2.6% 2017, Make Whole Call (cusip: 428236BW2) not call protected, sinking fund protection A3/BBB+ 100.60 2.47%
Hewlett-Packard Co Glbl Nt 2.65% 2016, Make Whole Call (cusip: 428236BL6) not call protected, sinking fund protection A3/BBB+ 102.97 1.8%
eBay Inc Sr Nt 4% 2042, Cont Call 01/15/42@Par, Make Whole Call (cusip: 278642AF0) not call protected, sinking fund protection A2/A 100.09 3.99%
eBay Inc Sr Nt 1.35% 2017, Make Whole Call (cusip: 278642AG8) not call protected, sinking fund protection A2/A 101.77 0.96%
Microsoft Corp Nt 5.2% 2039, (cusip: 594918AD6) call protected, sinking fund protection Aaa/AAA 130.14 3.45%
Microsoft Corp Nt 4% 2021 cusip: 594918AL8) call protected, sinking fund protection Aaa/AAA 117.15 1.77%
Dell Computer Corp Sr Deb 7.1% 2028, Make Whole Call (cusip: 247025AE9) not call protected, sinking fund protection A2/A- 126.12 4.7%
Computer Sciences Corp Sr Nt 4.45% 2022, Cond Put Change Of Control, Make Whole Call (cusip: 205363AN4) not call protected, sinking fund protection Baa2/BBB 101.32 4.28%

Check out the vast difference between Microsoft and eBay's debt-to-equity ratio compared with Hewlett-Packard, Dell and Computer Sciences Corp.:

HPQ Debt to Equity Ratio Chart

HPQ Debt to Equity Ratio data by YCharts

Companies with higher debt-to-equity ratios can perform well; however, Hewlett and Dell currently are not (Dell's debt is trending down.) Notice Computer Sciences Corp.'s debt-to-equity ratio is trending up; unlike Hewlett and Dell, however, its stock is not in a tailspin.

The companies' net income may hold a few answers:

HPQ Net Income Chart

HPQ Net Income data by YCharts

Though HP's performance looks terrible, the negative $8 billion is the result of a non-recurring $10.9B expense. A recent Seeking Alpha article further explores whether Hewlett-Packard has hit rock bottom. According to today's 13% nose dive, it appears the answer is no.

Tech. Outlook

Moody's (NYSE:MCO) downgraded Hewlett-Packard in January 2012.

Moody's Investors Service lowered all of the credit ratings of Hewlett-Packard, including the senior unsecured rating to A3 from A2 and short term rating to Prime-2 from Prime-1...

Key drivers to the projected credit profile include a more aggressive financial posture that has included a large debt financed acquisition, aggressive share repurchase activity, and somewhat "weaker operating performance expected over the next few years"

Richard Lane - Moody's Senior Vice President

As of August, Moody's outlook on Hewlett was stable; investors, however, appear worried. To properly diagnose the problem, let's look at Hewlett-Packard's revenue compared with Nokia (NYSE:NOK) and Apple (NASDAQ:AAPL). I chose them because Nokia recently pulled its head above water and Apple had a tremendous 52-week run.

HPQ Revenue Chart

HPQ Revenue data by YCharts

Keep in mind as HP's stock drops its dividend yield will go up, unless the company reduces or eliminates it. Now check out its long-term debt:

HPQ Long Term Debt Chart

HPQ Long Term Debt data by YCharts

Comparatively Hewlett-Packard is drowning in debt. Its bonds may appeal to some investors in search of yield, however at this point it may be wise to use a balanced approach.

Balanced Mutual Funds

Mutual funds with exposure to Hewlett stock have experienced losses because the company has declined. I searched for balanced mutual funds that might provide some exposure to Hewlett. These do not meet my criteria, because they are rated under 3 stars and / or have a front-end load:

  • Dodge & Cox Balanced Fund (DODBX) is rated 2 stars by Morningstar
  • George Putnam Balanced (PGEOX) is rated 1 star.
  • Victory Balanced Fund (SBALX) has a 5.7% front-end load and is only rated one star.

This brings me to WesMark Balanced (WMBLX) a 4 star Morningstar rated fund. WesMark has no front-end load and a 1.33% expense ratio (this is slightly high.) WesMark's balanced fund held 56% in domestic equity and 31% in domestic bonds as of June 30, 2012. It is a smaller fund with just around $71M in assets and it has a $2,500 minimum for non-IRAs and IRAs.

As of June 30, 2012 the top 10 holdings included:

Apple, Inc.
Home Depot (NYSE:HD)
Bristol-Myers Squibb Company (NYSE:BMY)
iShares Russell 2000 Growth index (NYSEARCA:IWO)
International Business Machines Corp (NYSE:IBM)
Cisco (NASDAQ:CSCO) Sys 5.5% - 02/22/2016
JP Morgan Chase (NYSE:JPM) 4.4% - 07/22/2020
Hewlett-Packard 3% - 09/15/2016
Exxon Mobil Corp. (NYSE:XOM)
Royal Dutch Shell ADR Class A (OTCPK:RYDAF)

A balanced mutual fund may make a good addition to a portfolio. Instead of one balanced mutual fund investors might consider two or three funds with holdings they like.

One of the top results for "five star balanced mutual fund" is FBR Balanced (AFSAX); this fund holds treasuries, Bristol-Myers and Wells Fargo (NYSE:WFC). Note FBR has a 1.6% expense ratio and no front-end load.

The next fund that surfaces is Nuveen Strategy Balanced Allocation (FSGNX). This fund is made up of of several Nuveen mutual funds, however it has a 5.7% front-end load (therefore does not meet my criteria.)

Currently Hewlett-Packard's coffers are filled with debt and the company lacks innovation. Though the bonds do look decent, the recent downturn is of great concern. HP must prove itself or it will continue to sink and it is unclear if its efforts will prevail. Therefore those who remain bullish on HP may benefit from balanced exposure at this point in time.

If you have any thoughts regarding Hewlett-Packard equity and debt or balanced mutual funds please comment below.

Disclosure: I am long AAPL, HPQ, MSFT, BMY, NOK, XOM, CSCO, IBM, MCO. 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.

Additional disclosure: I am considering WesMark and FBR mutual funds.