Facebook
Twitter
High dividend yields are hard to find in the technology sector. In fact, it was only until recently that technology companies even started paying dividends at all. For most of the past two decades, technology stocks were extremely reluctant to pay dividends to stockholders.
Back then, management teams insisted that they needed to retain as much of their cash flow as possible, to reinvest back into the business. But as investors saw profits being wasted on needless corporate spending, lavish executive bonuses and wasteful acquisitions that destroyed shareholder value, investors began to demand dividend payments.
Seagate Technology (NASDAQ: STX) is a rare find in the technology space, because not only does it pay a dividend, it yields a whopping 7%. Seagate’s huge dividend yield is the result of steady dividend growth, plus a recent decline in its stock price which has pushed its dividend yield to levels not seen since the financial crisis.
Seagate Stock Plunges
Seagate is a manufacturer of data storage products like hard disk drives. As a result, it is reliant on a strong personal computer industry to generate sales and profits. Unfortunately, the PC was been anything but strong in 2015.
Tech industry research firm International Data Corporation (IDC) found that PC shipments fell to their lowest level ever last year. Global PC shipments totaled just 276.2 million units in 2015, a 10.4% year-over-year decline from the 308.3 million recorded in 2014.
Last year was the first year since 2008 that shipments fell below 300 million units. The key contributors were slowing demand for PCs and laptops in emerging markets like China, where economic growth stalled last year. In addition, demand for PCs in general has tapered off in recent years, as a greater share of computing functions is now being done on smartphones and tablets.
The erosion in the PC market is a significant concern for Seagate. Investors rushed out of the stock last year, and understandably so — even the mere mention of 2008 as a comparable period sends shock waves through the investment community.
As a result, Seagate stock declined 46% in the past one year. The good news is that this has pushed Seagate’s $2.52 per share annual dividend to a greater than 7% yield, since stock prices and dividend yields are inversely related. And, Seagate stock is now dirt cheap on a valuation basis.
Why The Panic May Be Overblown
Seagate stock trades for just 8 times forward EPS estimates. This seems far too cheap. Seagate is indeed exposed to the declining PC industry, but PCs are likely to experience a bump next year. Customers at both the enterprise and individual levels put off PC purchases last year. But there should be a coming product refresh cycle, due primarily to accelerating adoption of Windows 10.
Concern over the emerging markets also seems overblown. Economic growth may slow in the emerging markets, but China is still expected to grow its economy by 6% this year. The emerging consumer class there means China and emerging markets more broadly still represent the greatest opportunity for economic growth in the world. Seagate’s aggressive investment in the emerging markets is the right long-term strategy.
And, Seagate has steadily built up its business outside of the PC. For example, in fiscal 2010 Seagate earned 37% of its total revenue from the cloud and new storage applications. In fiscal 2015, it earned 57% of revenue from these areas, and the percentage should only increase from here due to Seagate’s recent acquisition of Dot Hill Systems for $645 million.
Seagate’s revenue declined 20% in the past two quarters combined, but the company generated $860 million of free cash flow in that period. The dividend cost $351 million over those two quarters, so it seems the company generates more than enough cash flow to sustain its payout. As a result, Seagate could be a hidden high-yield gem.
DISCLOSURE: Bob Ciura personally owns shares of Seagate Technology (NASDAQ: STX).