Dividend Focus Stock: Powering Your Portfolio with Consistent Dividends and the Future of Enterprise Technology
This dividend payer is benefiting from strong demand across its product portfolio as customers continue to refresh aged infrastructure with more powerful servers.
Our Dividend Informer analysts like the prospects of this company as it transforms to focus on higher-growth, higher-margin markets through several divestitures and acquisitions.
Paid subscribers can read the full analysis on this featured dividend stock.
Since becoming an independent company, Hewlett Packard Enterprise has transformed to focus on higher-growth, higher-margin markets through several divestitures and acquisitions.
Overview
Its recent $13.4 billion acquisition of Juniper Networks is intended to bolster its networking business. The Intelligent Edge segment has been renamed Networking and now integrates HPE‘s existing business with Juniper’s.
The company’s operations are organized into five primary segments: Server, Hybrid Cloud, Networking, Financial Services, and Corporate Investments and Other.
HPE operates as an original equipment manufacturer (OEM), selling finished products to enterprises under its own brand, though the products are manufactured by original device manufacturers (ODMs). In this model, companies like HPE add value by coordinating a complex supply chain. However, competitors often source from the same ODMs, making it difficult for any one company to differentiate itself.
The Server segment provides general-purpose servers and integrated systems with software and hardware designed for advanced computing needs. Upgrade cycles for new technologies drive consistent, long-term demand from enterprise customers seeking packaged solutions for hybrid and on-premise deployments. While hyperscalers like Alphabet, Microsoft, Amazon, and Meta are significant buyers in the server market, they have the expertise to work directly with original device manufacturers (ODMs), bypassing OEMs such as HPE. AI-optimized servers have ignited growth in the otherwise stagnant server market. However, hyperscalers are again the largest buyers, and much of this new demand bypasses OEMs in favor of ODMs. The traditional server market has historically operated on low margins of around 10%, and margins for AI-optimized servers have been even lower, suggesting intense competition in this expanding segment.
The Hybrid Cloud segment offers a wide variety of cloud-native and hybrid solutions across storage, private cloud, and infrastructure software-as-a-service (SaaS). Its storage portfolio includes the HPE Alletra platform for data storage and management, solutions for unstructured data, and data protection, all enhanced by AIOps-driven intelligence from HPE InfoSight. In private cloud, the HPE GreenLake platform delivers a full suite of offerings for virtual machines, containers, and bare metal, allowing customers to self-manage or to opt for a fully managed experience. This segment also provides infrastructure software for monitoring and observability through OpsRamp and data lifecycle protection through Zerto Disaster Recovery.
The Networking segment combines HPE’s legacy network business with Juniper, developing high-performance network and security products and services. The hardware portfolio includes Wi-Fi and private cellular access points and a range of switches and routers. Software products like Mist and Aruba Central provide cloud-based and on-premise management, network access control, and security solutions. Margins and growth opportunities are more promising in the network segment, but larger players like Cisco and Arista Networks dominate the industry. The addition of Juniper will help HPE compete by adding more product offerings and delivering them through flexible consumption models via the HPE GreenLake platform.
The Financial Services segment offers flexible solutions including leasing, financing, IT consumption programs, and asset management services. These services help customers acquire IT solutions from both HPE and other providers.
The Corporate Investments and Other segment is small compared to the other segments and includes the Advisory and Professional Services business and its research and development arm Hewlett Packard Labs.
HPE is capitalizing on the secular tailwinds of artificial intelligence, and the AI business has become a primary growth catalyst. HPE GreenLake, the company’s edge-to-cloud platform, delivers the entire portfolio as a service. This platform provides a recurring revenue stream that moves away from the cyclicality of the hardware business and is measured by its Annualized Revenue Run-rate (ARR). Excluding Juniper’s recurring revenue streams, ARR grew 40% in the third quarter, which is in line with management’s long-term growth expectations of 35% to 45%.
Third-quarter revenue was $9.1 billion, an increase of 19% year-over-year, which included one month of Juniper revenues. Excluding Juniper, revenue grew an impressive 11% on strong demand across the product portfolio as customers continue to refresh aged infrastructure with more powerful servers.
The all-cash acquisition of Juniper Networks for $13.4 billion was financed with significant debt. This increased the company’s pro-forma net leverage ratio to 3.1x immediately following the acquisition.
Management is firmly committed to its investment-grade credit rating and intends to reduce leverage to a target of approximately 2x by the end of fiscal 2027. This focus on deleveraging will be the primary driver of capital allocation in the near term.
While HPE maintains a consistent dividend policy, share repurchases are expected to be modest and aimed primarily at offsetting dilution from stock-based compensation until the leverage target is achieved.
Scores
Capital Return: B
The current quarterly dividend of $0.13 per share has more than doubled since it was initiated following the company’s separation in 2015. Its current yield of 2.1% is significantly higher than the S&P 500’s average yield.
Based on the midpoint of management’s non-GAAP EPS guidance for fiscal 2025, the forward payout ratio is 27%, which suggests the dividend is well-covered and has room to grow. However, future dividend growth is expected to be modest until leverage is brought down toward management’s stated goal of approximately 2x.
Significant share repurchases are also unlikely in the near term, as management prioritizes paying down debt from the Juniper acquisition.
Growth: B
HPE is positioned in the high-growth AI and networking markets. The company has a $3.7 billion AI backlog that provides near-term revenue visibility.
The Juniper acquisition creates a formidable competitor in the networking space with substantial cross-selling opportunities into HPE‘s vast enterprise customer base. The company is also seeing strong customer adoption of its as-a-service offerings through the HPE GreenLake platform, which is central to its strategy of building a recurring revenue business.
Stability: C
The company’s diverse portfolio across servers, networking, and cloud provides a degree of stability against weakness in any single market. However, the hardware business is inherently cyclical, highly competitive, and exposed to macroeconomic headwinds.
Additionally, the increased debt load from the Juniper acquisition introduces higher financial risk until the leverage ratio is reduced from the initial 3.1x to the company’s target range of approximately 2x by 2027.
Governance: A
HPE maintains a strong governance structure, underscored by several shareholder-friendly policies including the absence of a poison pill.
The Board is led by an independent Chair, and 11 of the 12 directors are independent.
A cooperation agreement announced in July with activist investor Elliott Investment Management resulted in the formation of a new Strategy Committee on the Board. This committee is tasked with assessing business strategies and identifying opportunities for additional value creation, indicating that the board is proactively engaged and focused on enhancing shareholder value.
Hewlett Packard Enterprise is listed on the NYSE under the symbol HPE.
Website: https://investors.hpe.com
