I had previously been bullish on Hewlett Packard Enterprise Company (NYSE:HPE) twice (1,2), but over the last year, my perception of the company has changed. Disappointing growth numbers over the last few years and no clear strategy to change this have led me to think there is not enough upside on the stock to make it worth investing. The dividend is still nice and safe, but it’s not enough to compensate for the lack of growth.
Over the past three years, HPE has only experienced an 8% price appreciation, which pales in comparison to the 46% of the S&P 500 or the 99% of the S&P 500 Technology index.
Revenue and Cash Flow
Since separating from HPQ in 2015, HPE has failed to deliver revenue growth. In the last five years, despite efforts to expand its business, the company’s revenue fell by 5.25%. This is clearly worrisome, especially for a company in the information technology sector.
Some companies manage to become more efficient over the years, earning more money out of the same revenue. This was not the case with HPE. Since 2015, its income has fallen from around $2.5B to around $1B, while its operating cash flow has been steady at around $4B.
It’s clear the company is still having very solid results, and generating large amounts of cash. Nonetheless, I would have liked to see more growth either in revenue or cash flow from the company.
While we’re on the subject of cash flow, I believe the company has not made very efficient use of it. On the chart below, we can see that the company has been spending a lot of cash to buy back shares. Nonetheless, over the last three years, this has only resulted in a price appreciation of 8%.
For some context, over the last three years, the company has destined $8.4B to stock buybacks, but just $1.6B to common and preferred dividends. Hindsight is 20/20, but I would have rather seen those $8.4B being used for a combination of higher dividends and investments or acquisitions. The $8.4B in buybacks is also equivalent to 45% of the company’s $18.6B market cap.
One positive thing the stock has is its dividend. At the moment, HPE offers a dividend yield of 3.33%, which is not bad, especially now that interest rates are so low. Also, the dividend should be safe going forward, considering the payout ratio is just 26%.
(Taken from Seeking Alpha)
A payout ratio of 26% also implies that, if the company wanted, it could double its dividends and still have a margin of 48 cents per dollar of earnings for other purposes.
The bad thing is that the dividend alone is not attractive enough for me. If I could bank on long-term growth from the company, I would be very happy with the yield. But given that revenue has been mostly flat, I would need a much higher yield to feel comfortable investing in HPE.
I have mentioned growth as the most important factor for me to invest in HPE. Earlier this week, on February 3rd, the company announced the acquisition of startup Scytale. This cloud security company, which is three years old, had raised $8 million before HPE bought them.
In an article for TechCrunch, the author briefly explained the importance of this technology:
Scytale looks at application-to-application identity and access management, something that is increasingly important as more transactions take place between applications without any human intervention. – Ron Miller
This acquisition is clearly a step in the right direction, but I believe it’s not enough to move the needle at the moment. A company like Scytale that specializes in cloud security fits right into what HPE is looking to do with its cloud offerings. Maybe it helps increase the value of many of HPE’s services to its customers, but it will take some time to see results.
In the next few weeks, as more information about the deal is revealed, we’ll have more clarity on what to expect from Scytale. For now, without the price of the transaction and insights into the company’s strategic vision for Scytale, there is not much more to analyze.
HPE continues to deliver stable results, but I no longer feel it’s a worthy investment. For dividend investors, there are other companies with similar results and much higher yields, so HPE does not make much sense. For growth investors, the Scytale acquisition could indicate a change of direction for the better, but in my opinion it’s not enough. Overall, I’m not pessimistic about the company’s future outlook, but believe there is not enough upside to make it worth investing in.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.