Hewlett-Packard Company (HPQ), Microsoft Corporation (MSFT): Higher Dividend, Same Management

Dividend Hike

In a recent move the company management has increased the technology giant’s dividend to 14.52 cents per share. The change will be effective from 2013 May and investors would still receive a 13.2 cents dividend on April 2013. The company currently holds cash and short term investments worth $12.6 billion and total liabilities worth $83.4 billion. The dividend hike was much less than expected by the industry. Investors were looking for a bigger increase in the dividend to ensure that money was returned to shareholders rather than spent on pointless acquisitions.

HP is still behind its peers when it comes to a dividend yield. The current dividend hike brings the company’s dividend yield to approximately 2.5%. Microsoft Corporation (NASDAQ:MSFT) is offering a dividend yield of 3.2%, and International Business Machines Corp. (NYSE:IBM) a yield of 1.6%. On the other hand, IBM has appreciated by approximately 84% in the last five years. If we look at sustainability the dividend yield of HPQ seems to be the least vulnerable based on operating cash flows.

As the calculations above shows, Hewlett-Packard Company (NYSE:HPQ) has the highest operating cash flow yield, which shows that their operation have the best ability to sustain its dividend. On the other hand the situations of its two largest segments, Printer and PC, are pretty bleak. While Microsoft Corporation (NASDAQ:MSFT) has a strong foothold in the enterprise segment, which will ensure their operating cash flows are sustainable, HP is more vulnerable to falling OCF due to declining sales in its primary segments.

Therefore, despite a high OCF yield the company should not be considered a top dividend pick. Hewlett-Packard Company (NYSE:HPQ) will undergo some major restructuring, and it remains to be seen if it can successfully diversify itself away from just being a PC and printer company. At these levels International Business Machines Corp. (NYSE:IBM) and Microsoft Corporation (NASDAQ:MSFT) are much better dividend stocks due to most sustainable business models and chances of capital appreciation.

SmartEquity has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines Corp. (NYSE:IBM). and Microsoft.