Hewlett-Packard (HPQ) is set to restart its share repurchase activity after it was stalled for a brief period as the company was in “possession of material non-public information”, per its reports. The company also informed that it no longer has the information.
The current resumption in share buyback activity should instill confidence in H-P’s investors as it plans to return 50% of the free cash flow through share repurchases and dividends in fiscal 2014 and 2015.
In the 9-month period ended Jul 31, 2014, H-P returned $1.98 billion in share buybacks and $875 million in dividends. It is also worth noting that H-P reported free cash flow of $7.4 billion at the end of the third quarter. The company expects to end fiscal 2014 with free cash flow of approximately $9 billion. The company expects its fiscal 2015 free cash flow to range between $6.5 and $7 billion.
H-P also reiterated fiscal 2014 and fiscal 2015 non-GAAP earnings per share guidance of $3.70–$3.74 and $3.83–$4.03, respectively. The company issued the guidance while announcing the separation of its business into two publicly listed companies, earlier this month.
The unit separation comes at an opportune moment for H-P as it is seeing an uptick in its legacy PC business while its printing operations remain volatile. Moreover, the company will now be able to focus better on the emerging 3D printing segment. The company had earlier hinted that it was looking for opportunistic investments in the 3D printing market.
Also, the separation of the businesses is a rational choice. Although the PC and printing segment contributes approximately 50% of H-P’s revenues, profits from these businesses has been less than satisfactory over the last couple of years. The rest of the revenue comes from the Enterprise Group, Enterprise Services, Software and HP Financial Services segments.
Thus, the split would ensure a customized approach to two different kinds of businesses, which might not have been possible as a single entity.
We believe H-P’s growing focus on new business segments, such as electronic medical records, cloud computing and analytics will help it to grow in the ensuing quarters. Moreover, moderation in the PC market decline will help the company.
However, the sluggish macroeconomic environment remains a headwind. Also, H-P’s enterprise segment will now compete directly with International Business Machines (IBM), Cisco (CSCO) and Oracle (ORCL), which means that a lot still depends on execution.
Currently, H-P has a Zacks Rank #2 (Buy).
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