November 20, 2012 at 15:53 PM EST
Why Hewlett-Packard Will Likely Cut its Dividend Soon (HPQ)

PC and printer maker Hewlett-Packard Company (HPQ) has seen its stock decline for over a decade, and now it faces with even more problems, including an accounting fraud related to a recent acquisition. We wonder how long HP will be able to maintain its dividend payout (hint: not long).

A Disastrous Acquisition

H-P surprised both consumers and investors alike on Tuesday when it disclosed massive accounting irregularities at UK-based software firm Autonomy. The company acquired Autonomy back in 2011, and clearly didn’t do enough homework prior to the over $10 billion buyout. H-P’s official announcement about the matter noted, “HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP.”

News of the scandal pushed HPQ down another 12% today, adding to its long-term decline. As the old Wall Street saying goes, “At the first sign of accounting irregularities, sell.”

Fundamentals, Share Price Deteriorating

Hewlett-Packard’s four core businesses have all been taking hits as of late. According to the company’s latest earnings report, Personal Systems revenue plunged 14% from last year, printing revenue fell 5%, services revenue lost 6%, and Enterprise Servers, Storage, and Networking (ESSN) revenue plunged 9%.

HP’s share price has declined 55% year-to-date, and -77% in the last five years. The stock now sits at 15-year lows. What used to be a technology giant is now struggling just to survive. With the now-constant decline, new management may likely decide to exit some of its core businesses (current CEO Meg Whitman took the helm in September 2011).

Classic Value Trap

Because of its startling price decline, HPQ currently sports a dividend yield around 4.5%. Believe it or not, its annualized payout of 53 cents per share is probably sustainable for the time being. The company has cash on the books and is still profitable, but its earnings trend is clearly downward. Generally speaking, companies in downward spirals like these look to cut their dividends sooner rather than later.

The Bottom Line

HP’s accounting scandal is just another downer in a long string of negative events for the company. The combination of new management, declining earnings, and now accounting fraud likely spell a significant dividend cut in the near future. Thus, it would be wise for dividend investors to stay clear of HPQ.

Hewlett-Packard Company(HPQ) is not recommended at this time, holding a Dividend.com DARS™ Rating of 2.8 out of 5 stars.

Be sure to visit our complete recommended list of the Best Dividend Stocks, as well as a detailed explanation of our ratings system here.

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