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When investors think of technology stocks, dividends don’t usually come to mind. Indeed, many technology companies do not pay dividends, and those that do typically provide modest yields of 2% to 3%, at most. And that’s a shame, since regular and growing dividends are critical to building wealth.
But data storage company Seagate Technology (NASDAQ: STX) is a hidden gem in the tech sector. Even though it’s a tech stock, it offers a hefty 4.2% dividend yield, which is extremely high for its peer group. It has a dividend yield more like a sleepy utility than a technology stock, which is why investors looking for tech income stocks should take a closer look at Seagate.
Plenty of Value and Income
Seagate looks like a bargain. The stock trades for 9 times earnings and pays a 4.2% yield. It is cheaper and has a higher dividend than its closest competitors. Peer Western Digital Corp. (NASDAQ: WDC) trades for 13 times earnings and yields 2.5%.
The reason why Seagate is so cheap and has an elevated dividend yield is because its stock price is down 22% year-to-date. Investors have sold the stock based on fears that the weak personal computer industry will take a steep toll on Seagate’s sales and profits.
Market research firm IDC calculated that global PC shipments fell 11% in the second quarter. There are many causes for this, including the upcoming release of Microsoft’s (NASDAQ: MSFT) Windows 10, as well as slowing economic growth in emerging markets like China.
This hurts Seagate because of the rippling effect to PC-related accessories, such as hard drives and other data storage devices. Because of this, earlier this month Seagate cut its forecast for revenue and gross margin for its recently-ended fourth fiscal quarter.
But Seagate may turn around in the next several months.
Slowdown Is Likely Temporary
Seagate’s revenue fell 11% in the fiscal fourth quarter, which implies a serious deterioration. However, the first thing to note is that in the entire fiscal year, revenue was roughly flat. The one poor quarter looks more like an aberration than a pattern.
Consumers at both the individual and enterprise level are holding off on purchasing new PCs – and consequently PC accessories – until Windows 10 is released. After that, it will be important to gauge whether PC demand improves once again. If so, it’s very likely Seagate will see its revenue stabilize this quarter.
In the meantime, investors don’t have to worry about the security of Seagate’s hefty dividend. The company generated $1.9 billion of free cash flow in fiscal 2015. Its dividend costs the company $664 million, which amounts to just 35% of annual free cash flow.
And Seagate’s balance sheet is stuffed with cash. At the end of last quarter, it held $2.4 billion in cash, cash equivalents and short-term investments on its books.
Going forward, the company is concentrating investments on new developments in storage, like the cloud. This should help offset any continued weakness in PC-related revenue. While it’s true that more and more computing is being performed on mobile devices like smartphones, Seagate has an opportunity to adapt to the changing technology landscape.
For income investors, Seagate and its very high dividend look extremely attractive right now. To discover more sizzling income opportunities like this, click here.