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High dividend yields are extremely rare in the tech sector. Many tech stocks pay no dividends at all, preferring instead to reinvest all excess cash flow back into the business. There is good reason for this. The tech industry is fiercely competitive, and trends change rapidly. Tech companies must invest heavily to stay on top of the competition.
Even tech stocks that do pay dividends, such as Apple (NASDAQ: AAPL) or Microsoft (NASDAQ: MSFT), yield just 2%.
However, it is possible to find tech stocks that pay dividends well above 2%.
Consider Seagate Technology (NYSE: STX). The Seagate dividend yield is 6%. Seagate stock jumped 12% on Oct. 23 after the company posted better-than-expected quarterly earnings.
Income investors looking for value stocks should consider buying Seagate while it’s still cheap.
Seagate’s Earnings Performance
For the fiscal 2018 first quarter, Seagate had EPS of $0.96, on revenue of $2.63 billion. Revenue declined 6% from the same quarter last year, but both the top and bottom lines beat analyst estimates. Analysts had expected Seagate to report EPS of just $0.85, on revenue of $2.5 billion.
Seagate’s strong performance this year is a good sign that its turnaround strategy is working. 2016 was a challenging year for the company. Revenue declined 19% for the year. The biggest reasons for Seagate’s downturn in recent years, was a slowing PC market, and declining economic growth in China.
The PC is a major driver of external hardware device sales. As consumers are buying less PCs, they are buying fewer hard drives as well. Plus, technology is gravitating toward new storage technologies, which puts hard drives at risk.
In response, Seagate has launched a major restructuring. It cut costs, which helped profitability recover in fiscal 2017.
Revenue declined 3.6% for fiscal 2017, but cost cuts fueled helped gross margins expand by nearly six full percentage points. Seagate’s adjusted earnings came to $4.12 in fiscal 2017, and the company generated nearly $2 billion of cash flow for the year.
Seagate’s strong start to the current fiscal year sets the stage for a return to growth in 2018 and beyond.
Growth Catalysts
On the surface, it seems Seagate is dangerously close to obsolescence. Investors fear that hard-disk drives will be displaced by newer technologies such as solid-state drives. However, there are a few things for investors to keep in mind.
First, is that there is still strong demand from large customers. Consumers of large amounts of data need hard drives for their higher capacity and performance. Seagate’s 10 terabyte product has performed very well. The company shipped over 1 million of the 10 terabyte units last quarter, up threefold from the previous quarter. And, Seagate has a nearly 50% market share in this category.
Fundamentally, the proliferation of data helps support storage devices, which is not likely to change anytime soon. This is why Seagate’s hard disk drive exabyte shipments hit a record last quarter, up 5% year-over-year. The average capacity per drive across Seagate’s portfolio was also a record.
In addition, Seagate is investing heavily in new storage technologies, particularly in the cloud. In 2015, Seagate acquired Dot Hill Systems for $695 million, which gave Seagate valuation expansion in storage systems and software.
Seagate’s core HDD business is stabilizing, and the company has significant growth potential in cloud storage and NAND. Going forward, Seagate’s earnings are likely to grow, which could result in a higher valuation as well.
Seagate Dividend is a Draw
The stock market sits near record highs. As a result, value stocks are getting harder to find. Furthermore, the persistence of low interest rates means high dividend yields are just as scarce.
If Seagate’s turnaround strategy remains on track, the stock could be a diamond in the rough, with a P/E ratio of 14, and a 6.5% dividend yield.
Investors weary of high-priced stocks with little-to-no dividends, should consider buying Seagate while it’s still cheap and benefiting from the Seagate dividend.
Disclosure: The author is personally long AAPL, STX.