Time To Sell HPQ!

| November 1, 2011 | 0 Comments

A few months back, I explained why Hewlett-Packard (HPQ) could become the next great dividend growth stock.

At the time, HPQ’s former CEO, Leo Apotheker, had just announced the tech giant was exiting the personal computer business.  Apotheker said HPQ planned to spin off their PC portfolio within 18 months.

The plan was pretty straightforward… HPQ was pulling out of consumer products and focusing on enterprise products.

Why?

The reason’s simple.  Profit margins in the PC business are razor thin.  So, it’s hard to make money even if you sell a boatload of computers.

On the other hand, business products like enterprise software, data centers, and cloud computing offer hefty margins.  So, HPQ can make a lot more money on the same amount of sales.

In other words, HPQ was shifting their business model.  They were moving into the areas of tech with the most growth potential and profitability.

Sounds great, right?

I certainly thought so…

HPQ’s plan to spin off their PC business was very similar to what International Business Machines (IBM) did in 2005.  Back then, Big Blue spun off their PC business to Lenovo (LNVGY).

And IBM’s decision to focus on higher-margin business services paid off big time.

Since dropping their PC business, IBM has watched their stock soar by more than 150%.  Plus, they’ve increased their dividend from 20 cents to a healthy 75 cents per quarter.  A whopping 275% increase!

Any way you slice it, that’s an amazing dividend growth stock…

Obviously, owning IBM after they spun off their PC business was a great investment.  And it appeared HPQ was about to set off down the same path.  If HPQ could garner even a fraction of the success IBM did, it would become the next great dividend growth stock.

Unfortunately, HPQ didn’t live up to expectations.

Less than a month after Apotheker announced the decision to jettison the PC business, he was fired.  He lasted a mere 11 months on the job… And HPQ replaced him with former eBay (EBAY) CEO, Meg Whitman.

The way I see it, Meg Whitman is a poor fit for HPQ.  She lacks experience leading a software and services business.  And while she did a great job with eBay, Whitman has never handled a company with the size and complexity of HPQ.

Now HPQ is backtracking.

They’ve decided to remain in the PC business and restart production of other consumer products.  In other words, HPQ is staying in the lower margin PC business and backing away from growing the higher margin enterprise business.

More importantly, Hewlett-Packard is no longer following in IBM’s footsteps.  Simply put, HPQ is not the next great dividend growth stock.

The truth is… I don’t know what to make of HPQ right now.  The company is a mess.  And it remains to be seen if Whitman is up to the challenge of managing such a huge company.

As a result, I suggest cutting ties with HPQ.  There’s just no reason to own a floundering tech stock with falling earnings and no plan.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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