What's behind Warren Buffett's HP buy and why it's giving some analysts bad IBM flashbacks

Published Thu, Apr 7 202212:19 PM EDTUpdated Thu, Apr 7 202212:50 PM EDT

Warren Buffett is continuing to put to work Berkshire Hathaway's massive cash pile, this time with a $4.2 billion investment in the PC and printer maker HP to become his second biggest tech holding next to Apple . But why is the "Oracle of Omaha" buying an old tech company in a non-growth business that does not have a product or services business even comparable to Apple? Analysts said it is a classic value bet rather than a specific bet on HP's future or products and Buffett wants the consistent capital returns generated by HP's aggressive buyback program and sizable dividends. "Berkshire's decision to purchase HP shares is in line with their investment philosophy of buying undervalued — and sometimes out of favor — assets," said Cathy Seifert, a Berkshire analyst at CFRA Research. "The HP purchase dovetails nicely with Berkshire's overall investment scheme, which consists of a bar-belled allocation to tech and financial names." Before Thursday's double-digit jump in HP's share price, the stock was trading around 8 times forward earnings, which marks a big discount to the market as the price-to-earnings ratio for the S & P 500 currently sits at about 21. HP also has a big buyback program in place that outpaced the company's free cash flows last year. The company returned $1.8 billion to shareholders in the form of share repurchases and dividends in its fiscal first quarter, according to its quarterly results released in February. CEO Enrique Lores told CNBC earlier this year that his company is committed to buy at least $4 billion of shares in 2022. HP also pays an annual dividend yield of 2.5%. "We view the investment as driven by HP's strong capital return program and attractive free cash flow generation," Wamsi Mohan, analyst at Bank of America, said in a note. Another IBM? Still, some analysts are having flashbacks on a similar bet in the past that didn't work out very well for Berkshire. In 2011, Buffett built a $10.7 billion stake in IBM, at an average price of $170 per share, saying he was "hit between the eyes" by how IBM finds and keeps clients. However, by May 2018, Buffett revealed that he lost confidence in IBM and no lo