Should You Buy This Beaten-Down AI Stock for Its 4% Dividend Yield?

AI (artificial intelligence) - shutterstock_2242235005

Artificial intelligence (AI) is among the most promising investment themes in current times. While Nvidia (NVDA) might be the first name that comes to mind when we're talking about AI stocks, many other companies also stand to benefit from the growing adoption of generative AI.

FactSet scrolled through the earnings calls of all S&P 500 companies between Dec. 15 and March 14, and found that 179 of them used the term “AI” during their earnings calls. It was the second-highest instance of S&P 500 companies using this term during earnings calls; unsurprisingly, the highest was 181, during the Q2 2023 earnings season - when the AI euphoria was perhaps at its peak.

AI Stocks Are Not Known for High Dividend Yields

Most of the best-known AI plays - like Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Alphabet (GOOG) - are tech companies that either don’t pay a dividend at all, or if they do pay one, the yield is hardly enticing, and invariably below that of the S&P 500 Index ($SPX).

However, there are some AI plays out there that have a healthy dividend yield, even though they have not enjoyed the kind of “AI respect” as those Big Tech names. I believe HP Inc. (HPQ) is one AI play that looks like a good buy, and brings both its nearly 4% dividend yield and prospects of capital appreciation to the table.

HP Is a Beaten-Down Stock with a 4% Dividend Yield

With a YTD loss of almost 8%, HP is underperforming the markets. The stock’s underperformance is not limited to 2024, either, as HP has lost almost a fifth of its market cap over the last three years. 

Even the stock's 10-year return is 84%, which is well short of what the broader markets have delivered over the same period.

HP’s recent underperformance is due to stagnant PC sales, as well as structural headwinds in the printing industry. Even the legendary Warren Buffett has been trimming Berkshire Hathaway’s (BRK.B) stake in the PC maker.

Is HP Stock an AI Play?

HP is hardly a name that investors would think of first when investing in AI stocks. However, it looks like an AI play in its own right, as the sales of AI PCs gain traction in the coming quarters. While global PC shipments fell YoY in both 2022 and 2023, IDC expects volumes to rise 2% this year, and then increase at a CAGR of 2.8% between 2024 and 2028.

IDC listed an economic recovery and the replacement of PCs bought in the early days of the COVID-19 pandemic as among the reasons that would drive this growth in shipments. It also expects AI PCs to drive growth, and said the “availability of AI PCs, which will coincide with the beginning of a commercial refresh cycle in 2025” would help fuel demand. 

It added that gamers and creators will also need to look at AI PCs. While IDC does not expect AI capabilities to lead to a higher PC installed base, it does foresee a bump in average selling prices.

AI-enabled hardware, including PCs and smartphones, could be the next big thing. Incidentally, one reason why some analysts are bullish on Apple (AAPL) is because of the expected upgrade cycle for AI iPhones. JP Morgan analyst Samik Chatterjee believes that AI could fuel the same kind of iPhone upgrade cycle as 5G.

HP Looks Like an AI Stock Worth Buying for Dividend Investors

HP is also revamping its portfolio with AI capabilities. During the fiscal Q1 2024 earnings call earlier this year, management said, “This is just the start of what will be an exciting year for AI PC innovation as we bring new products to market with our silicon and software partners in the coming quarters.”

The release also said, “Alongside the PC opportunity, we continue to develop new AI applications to run on top of our installed base of more than 200 million commercial devices.” 

While analysts expect HP’s sales to fall YoY in the current fiscal year, they see revenues rising 3.6% in the next fiscal year. Its profit growth is expected to surpass top-line growth on the back of structural cost cuts.

HP also has a generous shareholder payout policy, and is committed to returning all of its free cash flows to investors 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.

HP’s valuations also look attractive right now. The stock trades at a next 12-month price-to-earnings multiple of 7.92x, which is below its five-year average. As demand for AI PCs leads to higher shipments and profits, HP stock might see a rerating in the coming quarters.

Overall, with attractive valuations, an expected rebound in sales and profitability, and a strong dividend yield, HP looks like an AI play worth considering at these prices.

On the date of publication, Mohit Oberoi had a position in: NVDA , BRK.B , META , GOOG , MSFT , AAPL , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.