These 2 High-Yield Dividend Stocks Are Incredibly Cheap

The deterioration in the personal computer industry has weighed on a number of technology companies. There is arguably no industry group getting hit harder by this than the hard disk drive manufacturers, Seagate Technology (NASDAQ: STX) and Western Digital (NASDAQ: WDC).
These stocks crashed in mid-2016, but have recovered significantly off their 52-week lows, as investors are realizing the panic-selling did not match the reality. While both companies are suffering from several headwinds, including the decline of the PC, the strong U.S. dollar, and slowing economic growth in the emerging markets, each company has a sound plan for growth.
Until Seagate and Western Digital return to growth, they are both highly profitable and generate massive amounts of cash flow. These high-yield dividend stocks offer sky-high dividend yields of 7.5% and 4.3%, respectively, which pays investors very well to wait for better days.
Growth Initiatives Gain Traction
Seagate and Western Digital are pursuing different paths, but each have a plan to branch out from their core hard disk drive businesses.
For Seagate, future growth will be in the cloud. The company has targeted growth in cloud storage through internal investment as well as through acquisition. Seagate acquired cloud storage company Dot Hill Systems (Nasdaq: HILL) for $645 million last year, to boost its growth in storage systems and software.
Seagate’s revenue in the most recent fiscal year declined 19% year over year, which is surely disappointing, but there are signs that the company can return to growth soon. More than 30% of its revenue comes from the cloud and other areas not exposed to the decline in the PC.
Seagate is pursuing a significant restructuring to cut costs and keep margins healthy until business conditions improve. Its gross margin, increased five percentage points last quarter, from the previous quarter. And, revenue grew 2% quarter-over-quarter.
Management sees further improvement up ahead: current-quarter revenue is expected to reach $2.7 billion of revenue in the current quarter, along with a 27% gross margin. This would represent growth on both metrics once again this quarter.
Seagate’s 7.5% dividend yield would normally be a red flag that the company’s deteriorating financials may result in a dividend cut, but the company can afford its generous payout because it generates enough free cash flow.
Seagate produced $1.1 billion in free cash flow in the fiscal year, which easily covered its dividend payments of $727 million.
For its part, Western Digital has targeted growth in flash storage to offset weakness in its core HDD business. Earlier this year, it acquired SanDisk in a major $16 billion deal. Western Digital also expects to produce around $500 million in annual cost savings going forward.
SanDisk is a leader in flash-chip storage technology. Its products are widely used in not just PCs, but also smartphones and tablets. The combined company will generate annual revenue of approximately $20 billion.
Western Digital has a strong balance sheet, with more than $8 billion in cash and equivalents. This is a big cash buffer that can be used to invest additional resources in future growth opportunities, and also reward shareholders with a hefty dividend.
Despite the slowdown in the PC, Western Digital still earned $5.09 per share in adjusted profit last year, which was more than enough to cover its $2 per share dividend. The company produced $1.3 billion of free cash flow last year.
High-Yield Dividend Stocks, On Sale Now

Not only do Seagate and Western Digital offer high dividend yields with the potential to return to earnings growth over the next year, but their stocks are incredibly cheap.
With a forward P/E multiple of 10, below the comparable valuation for the S&P 500, Seagate stock could be too cheap. Meanwhile, Western Digital is an even better bargain–it trades for a forward P/E ratio of just 7. As a result, these high-yield dividend stocks could be undervalued stocks and attractive picks for both value and income investors.
 
Disclosure: The author is personally long STX.