HP's (NYSE:HPQ) Five-Year Total Shareholder Returns: Outpacing Earnings Growth

In the ever-evolving landscape of technology stocks, HP Inc. (NYSE:HPQ) has managed to carve out a niche for itself, delivering impressive total shareholder returns (TSR) over the past five years. Despite a recent pullback in share price, the company's TSR has outpaced its underlying earnings growth, making it an intriguing case study for income-focused investors. Let's delve into the key factors driving this discrepancy and explore the implications for future growth and shareholder value.

Dividend Payments: The Cornerstone of TSR

One of the primary drivers of HP's impressive TSR is its robust dividend policy. Over the past five years, HP has consistently increased its dividends, with 14 consecutive years of dividend increases. This commitment to returning value to shareholders has significantly boosted the TSR, which stood at 67% over the same period. For instance, HP declared a cash dividend of $0.2756 per share in its fiscal year 2024, payable on July 3, 2024. This dividend is the third in HP’s fiscal year 2024, underscoring the company's dedication to providing a steady income stream for its shareholders.

Market Sentiment and Share Price Performance

While dividend payments have been a significant contributor to HP's TSR, market sentiment and recent share price performance have also played crucial roles. Despite achieving compound earnings per share (EPS) growth of 7.2% per year over five years, HP's share price growth was only 7%. This suggests that the market sentiment around the company hasn't changed much over that time. The share price is reacting to the EPS, but other market factors, such as broader economic conditions or investor perceptions, may also influence the share price.

Recent Share Price Performance

HP's share price has fallen 32% over the last three months, which is a significant drop. This recent pullback could be due to various factors, including market volatility, changes in investor sentiment, or specific company developments. For example, the company's earnings per share (EPS) growth of 7.2% per year is close to the yearly share price growth of 7%, indicating that the share price is reacting to the EPS. However, the recent 19% pullback suggests that there may be other factors at play, such as broader market conditions or specific company news.

Sustainability of Factors

The sustainability of these factors in the long term depends on several variables:

- Dividend Sustainability: HP has a history of increasing its dividends regularly, with 14 consecutive years of dividend increases. This suggests that the dividend payments are likely to continue, contributing to the TSR in the long term. However, future dividend sustainability will depend on the company's financial performance and cash flow.

- Earnings Growth: HP's earnings growth rate is forecasted to be 4% per annum, while EPS is expected to grow by 8.1% per annum. If the company can maintain or exceed these growth rates, it will likely support long-term share price performance and TSR.

- Market Conditions: Long-term sustainability also depends on broader market conditions and investor sentiment. If the market continues to favor technology stocks or if HP can demonstrate strong fundamentals and growth prospects, it could support long-term share price performance.

Dividend Policy and Share Repurchase Program

HP's dividend policy and share repurchase program play a significant role in enhancing its total shareholder returns (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. For HP, the TSR over the last 5 years was 67%, which is better than the share price return mentioned above. This indicates that the dividends paid by the company have boosted the total shareholder return.

In addition to dividends, HP has also been actively repurchasing its shares. For example, in the first quarter of fiscal 2025, HP returned $0.4 billion to shareholders in the form of share repurchases and dividends. This share repurchase program helps to reduce the number of outstanding shares, which can increase earnings per share (EPS) and potentially boost the stock price. The company utilized $100 million of cash during the quarter to repurchase approximately 2.7 million shares of common stock in the open market.

Implications for Future Growth and Shareholder Value

The implications of these policies for future growth and shareholder value are multifaceted. On one hand, a robust dividend policy can attract income-oriented investors and provide a stable return on investment. On the other hand, share repurchases can enhance EPS and potentially drive stock price appreciation. However, it is important to balance these policies with reinvestment in the company's growth initiatives. HP's focus on innovation and high-value categories, such as AI PCs, is set to drive revenue growth and higher average selling prices (ASPs) in the personal computing segment. This strategic investment in growth areas can ensure sustainable long-term value creation for shareholders.

Conclusion

In conclusion, HP's five-year total shareholder returns outpacing its underlying earnings growth can be attributed to its robust dividend policy, market sentiment, and recent share price performance. While these factors have driven the discrepancy, their sustainability will depend on the company's ability to maintain dividend payments, achieve earnings growth, and navigate broader market conditions. For income-focused investors, HP's dividend policy and share repurchase program offer a compelling case for long-term investment, provided the company continues to balance these policies with strategic investments in growth areas.