Are Dividend Investors Making A Mistake With Hewlett Packard Enterprise Company (NYSE:HPE)?

Dividend paying stocks like Hewlett Packard Enterprise Company (NYSE:HPE) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a five-year payment history and a 5.1% yield, many investors probably find Hewlett Packard Enterprise intriguing. We'd agree the yield does look enticing. The company also bought back stock during the year, equivalent to approximately 9.8% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Hewlett Packard Enterprise for its dividend - read on to learn more.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Hewlett Packard Enterprise pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Hewlett Packard Enterprise paid out 375% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term.

Consider getting our latest analysis on Hewlett Packard Enterprise's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Hewlett Packard Enterprise has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.2 in 2015, compared to US$0.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Hewlett Packard Enterprise's EPS have fallen by approximately 20% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Hewlett Packard Enterprise's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. In this analysis, Hewlett Packard Enterprise doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Hewlett Packard Enterprise has 2 warning signs (and 1 which can't be ignored) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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