President Donald Trump threatened to impose reciprocal tariffs on April 2 and emphasized that these tariffs would mark a “liberation day” for the U.S. economy. However, the president, who has put punitive tariffs at the center of his economic and foreign policy, has signaled flexibility and said that he might spare some countries from the reciprocal tariffs.
While there remains considerable uncertainty over the tariffs, HP (HPQ) is one name that would benefit if Trump goes soft on tariffs.
In this article, we’ll look at the risks and opportunities that investors should be mindful of before buying HPQ stock, which has a dividend yield of 4%.
HP’s Dividend Policy
HP has a generous shareholder payout policy. It is committed to returning all of its free cash flows to investors through dividends and buybacks as long as its gross debt to earnings before interest tax, depreciation, and amortization (EBITDA) multiple is below 2x, and it does not see other opportunities that promise a higher return on investment.
The Case for Buying HP Stock
I find HP stock a good buy for the following reasons.
- Revival in the PC market: The PC market was subdued after strong growth in 2020 and 2021. However, the market has been recovering and industry shipments are expected to rise by mid-single digits in 2025. HP sees the Windows 11 refresh and the aging of the current installed base of PCs as two key drivers for PC industry growth.
- AI PCs: HP listed the increasing penetration of artificial intelligence (AI) PCs as another bullish driver for the PC industry. Notably, HP and other industry players are working to add AI capabilities to PCs which is expected to support volumes.
- Increase in Margins: HP believes that the average selling prices of its AI PCs will be 5%-10% higher than other PCs. This, coupled with its cost-cut efforts, should help support margins over the medium term.
- Reasonable Valuations: HP trades at a forward price-earnings (P/E) multiple of just 8.1x which is below what the stock has historically traded at. With the company expected to benefit from the PC refresh cycle and growing penetration of AI PCs, I find the multiples somewhat attractive here if not outright mouthwatering.
Key Risks HPQ Investors Should Watch Out For
Meanwhile, there are several risks that investors should watch out for. Firstly, the macroeconomic slowdown could dampen the expected uptick in the PC refresh cycle. Secondly, while several third-party reports call for AI PC penetration to rise significantly by the end of this decade, companies might need to add more AI functionality to justify the higher price tags.
Finally, HP is among the names that would be at the receiving end of Trump’s reciprocal tariffs. While the company has restructured its supply chain and estimates that 90% of the products it sells in North America will be made outside of China by the end of its fiscal year 2025, it will still rely on imports from other regions. There is a lot of uncertainty over which countries Trump could slap with reciprocal tariffs and which he might spare.
All said, I find HP’s risk-reward quite balanced here and the stock seems to price in most negatives. The stock might fit into the portfolios of investors who are looking for high-dividend stocks. While HP’s earnings are expected to grow in mid-single digits over the next couple of years, the company remains a free cash flow powerhouse and expects to generate free cash flows of $3.4 billion this fiscal year.
Healthy free cash flows would let HP keep paying fat dividends while also capitalizing on any growth opportunities that come its way - just as it acquired AI capabilities from Humane earlier this year in a $116 million transaction.
HPQ Stock Forecast
Of the 14 analysts covering HPQ, only 4 rate it as a “Strong Buy” while 9 rate the stock as a “Hold.” One analyst rates HP as a “Strong Sell.” However, amid the recent fall, HP has even fallen below its Street-low target price of $30 while its mean target price of $36.75 is almost 27% higher than the March 24 closing price.
