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Classic Head-Fake From a Former Tech Great

Traditionally, we like to see dividend increases.

By rewarding investors with increased capital participation, a dividend bump is a sign that management has confidence in the company’s performance, and its prospects for the future.

But dividend hikes aren’t always good things.

Sometimes, an increase in dividends is a cry for help during turbulent times. A way to massage business page headlines to make things appear rosy – when they’re not.

Like the proverbial pig in lipstick, a dividend increase can sometimes be a way to hide ugly truths.

Such is the case with Hewlett-Packard (HPQ).

Because despite a ballyhooed bump in dividends recently… this pig ain’t going to prom anytime soon.

Hewlett-Packard has been one of the most oft-told success stories in American business history.

Born during the depths of the depression in a one-car garage in Palo Alto, California, Stanford graduates Bill Hewlett and Dave Packard created not just an electronics company, but the very symbol of the American can-do dream.

From those modest beginnings decades ago, HPQ grew to become the largest PC manufacturer in the world.

Unfortunately, that doesn’t mean much today, because the PC market is sinking rapidly.

All the while, HPQ is desperately trying to keep its head above water. And having a hard time doing it.

Let’s Not Mince Words…

HPQ has been a disaster for investors.

In fact, if you’d owned $10,000 worth of HPQ shares in 2005, today, they’d be worth… $10,000.

Zero capital growth in eight years. And that’s the positive scenario!

If you’d bought HPQ in 2010, as it was hitting a high of $54, you’d be down about 50% today.

HPQ, it turns out, has displayed an uncanny ability to consistently shoot itself in the foot.

A long line of ruinous CEOs, acquisition missteps and mismanaged market moves have regularly driven shares into the ground.

Take the purchase of Compaq. Sure, it allowed HP to become the largest PC maker in the world, but it also led to reduction in research and development.

Because of it, HPQ is now in the position of constantly needing to play catch-up, as clients shift to competitors better positioned to handle software-as-a-service (SAAS) and cloud computing, among other services.

This “follow the leader” stance has led to nothing but trouble.

Cue recent investor frustrations that ignited a vicious shareholder rebellion that almost ousted five board members. It was an ugly scene.

One of the major sparks setting off this explosion of investor anger was the botched acquisition of software company, Autonomy. This led to HPQ taking an $8.8-billion write-down, fueling accusations of fraud between HPQ and Autonomy’s former owner.

Not all is in order, apparently, in the house of HP.

A Dividend Cover-Up                                        

Sure, the dividends have been paid consistently over all these years…

But consider this: Over the past 10 years, HPQ has only raised its dividends three times. Even when share prices were flying high, it never paid more than $0.08 a share.

The first boost didn’t come until 2011, just as HPQ began a wretched drop-off in share price. The next payout boost was last year, as shares began another slide.

At root, this recent shareholder ugliness is the real reason the company decided to raise dividends again, bumping payments up 10% to $0.1452 from $0.132 cents.

To me, this move is meant to assuage angry investors, not an honest display of corporate confidence.

It’s a smoke and mirrors move, designed to take attention away from the infighting and the dismal prospects the company faces going forward.

So, I say: “Run away!”

With an anorexic yield of just 2.2%., HPQ is much more headache than it’s worth. And likely will be for some time.

Safe investing,

Tim Diering