HP Inc Stock Is Attracting Value Buyers with Its High Yield and Low P/E

HP Inc (HPQ), the computer and printer company - not to be confused with Hewlett Packard Enterprise (HPE) - recently raised its dividend, as it has in the past 12 years. Value investors find this attractive, along with HPQ stock's low P/E multiple. 

In addition, its options also have high premiums, making them good income plays for those to value investors who short them for income plays.

Dividend Growth Attractive to Value Investors

On Nov. 22, the company announced it had raised its Q4 dividend to 25.25 cents per share, a hike of about 5% from the prior 25 cents/qtr. Therefore, its annual dividend is now $1.05 per share, representing a dividend yield of 3.92% as of its price on Friday, Dec. 24, of $26.76.

This high yield is well over its historical yield of 2.91% over the last 5 years, according to Morningstar. At that yield, HPQ stock should trade at $36.08 per share. 

In addition, this is now the 12th year in a row it has hiked the dividend. These three dividend-related reasons - the hike, the average yield, and the consistent growth -  are all very powerful attractions to value investors. 

Earnings and Free Cash Flow Growth Attractive

In addition, although its Q4 earnings were lower than expected and lower than where it guided, analysts still forecast higher earnings per share (EPS) for next year. The average of 8 analysts covered by Barchart is $3.35 per share for the year ending Oct. 2023. This is also within the range that the company guided for next year on Nov. 22. Their outlook is for between $3.20 and 3.60 per share non-GAAP EPS.

Based on Morningstar's historical average P/E of 8.98x, HPQ stock is worth $30.08 per share (i.e., $3.35 x 8.98x).

Moreover, the company's free cash flow (FCF), which pays for the dividends and its huge stock buybacks, is very strong. Last fiscal year ending Oct. 31, it produced $3.9 billion in FCF, including $1.8 billion in Q4 alone. Moreover, the company said it expects to have between $3.0 billion and $3.5 billion in FCF during fiscal 2023 ending Oct. 31, 2023. Here is what the company said about its FCF used for buybacks and dividends:

“HP utilized $4.3 billion of cash during fiscal 2022 to repurchase approximately 126 million shares of common stock in the open market. When combined with the $1.0 billion of cash used to pay dividends, HP returned 138% of its free cash flow to shareholders in fiscal 2022.”

Given that its market cap is just $26.7 billion, with about 1 billion shares outstanding, this $5.3% billion return of capital represents almost 20% of the total market value. That is an incredible total yield percent return to shareholders. 

As a result, even if the company has a 15% return on capital, the stock should be at $35.68 per share (i.e., (0.2 x $26.28)/.15 = $35.68). 

The bottom line, then, is that there are three ways to value HPQ stock. The first, based on dividends is $36.08 (see above). The second, based on its historical P/E, is $30.08, and the third, based on FCF is $35.68. Therefore, the average target price is $33.95. That represents a potential upside of 29.2% from today's price of $26.28 per share. 

Shorting Puts and Calls for Income

HPQ stock has very attractive put and call premium prices. For example, the Jan. 27 expiration (one month out) options chain shows that the $30.00 call premium is 17 cents. Remember this strike price is well below our price target of $33.95. 

But the stock may not reach this target in just one month. It still represents a potential upside of 14.16% if the price reaches $30 by Jan. 27. In addition, the investor gets to make 0.64% in immediate income (i.e. $0.17/$26.28). 

Over a 12-month period, if repeated each month, that represents an annualized return of 7.76%. This is on top of the 3.92% dividend yield HPQ stock produces for investors.

In addition, the $24.00 strike put option has a high premium of 25 cents per contract. That represents an immediate yield of 0.95%, almost 1.0%. The stock would have to fall over 10% from today by Jan. 27 before the investor would be required to buy the stock at $24.00 per share. This is also attractive to value investors.

The bottom line here is that value investors find HPQ stock very attractive, given its high target price and high option prices that can be shorted for income.

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