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Seagate: This 5.9 Percent Yielding Tech Stock Deserves Your Attention

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Ken Wolter | Dreamstime.com

By Monday, 19 November 2018 05:35 PM Current | Bio | Archive

Technology stocks are not usually associated with dividends. Many technology companies do not pay dividends at all, while many others that do pay dividends have fairly low yields of 2% or less.

There is good reason for this — the technology industry is intensely competitive, and highly cyclical. Trends change so quickly that many technology companies are reluctant to pay dividends, instead preferring to reinvest all excess cash flow back into the business.

But attitudes have shifted in recent years. Investors are increasingly pushing large-cap, mature technology companies to share some of their cash flow.

Many companies have responded, such as Seagate Technology (STX) which yields nearly 6%, an abnormally high yield for a tech stock. Seagate is a unique stock with the high dividend yield of a utility, but with the growth prospects of a tech stock.

Business Overview And Growth Catalysts

Seagate manufactures external data storage devices, primarily hard disk drives. Despite various risks to future HDD demand, including the rise of SDDs, Seagate’s fundamentals are strong. Seagate Technologies reported its first quarter earnings results on November 2.

The company was able to produce revenues of $3 billion, an increase of 14% compared to the previous year’s quarter. This was the highest quarterly revenue that Seagate Technologies has reported over the last two years, and more than what the analyst community had expected. Seagate Technologies earned $1.70 per share during Q1, an increase of 77% year over year.

Seagate has also made significant investments in new areas to fuel its future growth. For example, cloud-based storage is a growth category, and Seagate is moving aggressively to expand there. Seagate’s $695 million acquisition of Dot Hill Systems boosted its cloud-based storage and software business. More recently, on June 1st Seagate announced an investment of approximately $1.3 billion in the private equity-led acquisition of the Toshiba Memory Corporation. Seagate is also investing in SSDs, particularly in the consumer, gaming, and software-as-a-service markets.

Seagate has a positive growth outlook for the future, as demand for storage is only set to increase in the years ahead. Consumers and businesses utilize huge amounts of data, and that should only continue. Over the last five years, demand for Nearline HDDs (an intermediate type of data storage that makes up roughly half of Seagate Technologies’ HDD sales) rose by 35% annually. Future growth applications for Seagate’s various storage investments include the Internet of Things (IoT), data analytics, autonomous driving, and cloud computing will all service the rising amount of data that needs to be stored.

Seagate currently pays a quarterly dividend of $0.63 per share, which works out to an annual payout of $2.52 per share. At the recent share price of $43, Seagate has a hefty 5.8% dividend yield. Seagate can offer investors such a high dividend payout, because the company generates significant cash flow from operations.

Cash Flow Secures The Dividend

In the most recent fiscal year, Seagate generated free cash flow of $1.7 billion. This allowed it to pay cash dividends of $726 million to shareholders and repurchase 10 million ordinary shares for $361 million. Even with such a high level of cash returns to shareholders, there was cash flow left over to invest in strategic growth initiatives.

Not only that, but the company also returns cash to shareholders through stock buybacks. Seagate announced a new $2.3 billion buyback program in November. This brings Seagate Technologies’ total buyback authorization to $3 billion, or 25% of its current market capitalization, which means the repurchases could be a significant tailwind for future earnings growth.

Seagate should be able to maintain its generous cash returns, as the company enjoys competitive advantages within the storage industry. Seagate is one of the largest data storage companies. It is a major player in a relatively narrow, focused industry. The data storage device industry has consolidated in recent years, leading to an oligopoly, which is beneficial for Seagate’s margins and limits competitive threats.

Final Thoughts

High dividend yields of nearly 6% are hard to find in the stock market, and that is especially true in the technology industry. Seagate’s dividend yield is more in-line with what a utility would pay, with the added bonus of growth.

As long as Seagate retains its industry leadership position and executes on its growth initiatives, the dividend should remain intact. This makes Seagate an attractive stock for income investors looking to add exposure to the tech sector.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Technology stocks are not usually associated with dividends. Many technology companies do not pay dividends at all, while many others that do pay dividends have fairly low yields of 2% or less.
tech, stock, seagate technology, dividend
Monday, 19 November 2018 05:35 PM
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