Hewlett-Packard: Splitting in Two

02/05/2015 7:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Founded in a garage in 1939, this company is one of America’s oldest and largest technology firms, well known for its PCs and printers, explains Elliott Gue, editor of Capitalist Times.

This year, Hewlett-Packard (HPQ) will undertake one of the most important strategic moves in its history when it splits into two companies: HP and Hewlett-Packard Enterprise.

HP will house Hewlett-Packard Company’s consumer-focused business—including PCs and printers—mature product categories with modest growth potential. This business generates significant free cash flow, suggesting that HP will pay a solid dividend. We also see the potential for steady share buybacks over time.

In the short- to intermediate-term, HP should benefit from the refresh cycle underway in the PC market, as households and businesses replace older computers with new models. Many held off on these upgrades in the wake of the 2007-09 downturn.

HP’s 3-D printing business shows long-term promise, with the company planning to roll out a high-end commercial model that designers can use to prototype new products.

Meanwhile, Hewlett-Packard Enterprise will focus on selling servers, data-storage devices, and networking equipment to business customers.

Corporate restructurings of this nature often produce big gains for shareholders, before and after the transactions takes place. We expect Hewlett-Packard Company’s split to follow this pattern.

HP’s strong cash flow profile suggests that the firm will shoulder most of Hewlett-Packard Company’s debt load, freeing relatively unencumbered Hewlett-Packard Enterprise to pursue acquisitions.

HP will appeal primarily to income-seeking investors, while Hewlett-Packard Enterprise will become more of a growth story. The stock could be worth a combined $60 per share after the split. Hewlett-Packard Company joins our Wealth Builders portfolio.

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