Warren Buffett Just Bought More of This Dividend Tech Stock. Should You Buy?

The release of the 13F document by Berkshire Hathaway usually brings a few surprises every quarter. The form, which shows Berkshire’s holdings at the end of a given quarter, revealed that Berkshire’s largest percentage increase was in its HP (HPQ -0.80%) position.

Buffett and his team increased their position in the tech stock by 16%. Admittedly, HP has hiked its payout yearly since Hewlett Packard Enterprise spun off in 2015. But with the company offering primarily commoditized technology products, is the company a good choice for dividend investors?

The HP dividend and financials

Today, HP pays an annual dividend of $1.05 per share. At current prices, that amounts to a dividend yield of around 3.5%, more than double the S&P 500 average of 1.6%.

Moreover, the dividend appears stable. In the first two quarters of fiscal 2022 (ended April 30), the payout cost the company $518 million, well above the company’s free cash flow for the period of approximately $298 million. Still, with fiscal 2023 free cash flow expected to come in between $3 billion and $3.5 billion, the company can probably finance the dividend and its growth longer term.

However, HP’s finances appear more concerning over the long run. In its fiscal second quarter, ended April 30, its $13 billion in revenue fell 22% from year-ago levels. This continues a trend as revenue fell 21% in the first two quarters of the year and by 1% in fiscal 2022.

But despite the revenue decline, cuts in costs and expenses and an income tax benefit boosted net income. This led to almost $1.1 billion in Q2 net income, just above the $1 billion earned in the year-ago quarter. Still, the company anticipates between $2.91 per share and $3.11 in net income. This compares well to the $3.05 per share earnings in fiscal 2022.

HP as an investment

Despite the improvement, Berkshire’s 12% stake in HP may seem counterintuitive. Its primary lines of business are PCs and printers, both commoditized businesses with slow long-term growth. More recently, the increases gave way to declines amid the end of the pandemic, and the slowing economic growth weighed on sales.

Additionally, Buffett’s team first bought this stock in the first quarter of 2022, right as the bear market in technology stocks had just begun. Since the beginning of 2022, HP has fallen more than 20%. While Berkshire could hold a profit on the position it acquired recently, it is probably down on this investment overall.

Still, given other factors, one can see why HP might have appealed to Buffett. When Buffett’s team bought the initial stake, HP’s P/E ratio was in the 6 or 7 range. And now, at 11 times earnings, it looks like a relative bargain.

Another benefit is the payout. Between the aforementioned 3.5% dividend yield and the years-long track record of payout hikes, HP stock could appeal to investors who want a cash return but do not want to put money in the bank.

Should investors buy?

Given the state of HP stock and the underlying business, only income investors should consider adding shares. Amid revenue declines and slow income growth, HP sells at a low valuation. Moreover, with a 3.5% dividend return that is on track to grow every year, it should give investors a significant cash yield.

However, the PC and printing businesses are mature industries unlikely to post huge revenue increases. Given that low growth potential, most Buffett fans should probably avoid following him into this investment.

Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway and HP. The Motley Fool has a disclosure policy.