Tech stocks are not normally associated with dividends. For many years, the prevailing belief was that tech stocks should not pay dividends to shareholders. Instead, they should retain as much cash flow as possible to reinvest in growth initiatives since technology changes rapidly and is mostly known as a growth industry.
Things have changed, however. Many tech stocks in the Nasdaq 100 Index now pay dividends to shareholders. The highest-yielding tech stock in the index is Seagate Technology (STX, Financial), which has a whopping 5% dividend yield. High yields like this are very rare in the technology industry, which is why Seagate could be uniquely attractive for income investors.
Cash flow supports dividend
Seagate manufactures data storage devices, primarily hard disk drives. The company’s high dividend yield is partly due to a very low stock valuation. Shares trade for a price-earnings ratio of just 9.3. There is some concern that Seagate’s future growth could level off as HDD products are expected to be less relevant with the emergence of new technologies, such as solid-state drives. Plus, the slowdown of the personal computer industry is a risk for HDDs as the PC is a major driver of external hardware device storage devices.
Seagate continues to perform well, however, as HDDs still have a place, particularly from large customers. Consumers of large amounts of data still need hard drives for their higher capacity and performance. The company recently reported strong fourth-quarter and fiscal 2018 financial results. The average capacity per drive across the company’s HDD portfolio reached a record in the most recent quarter, increasing 40% year over year, while average selling price per unit rose 12% year over year. Total exabyte shipments increased 29% in fiscal 2018. Revenue increased 4% to $11.2 billion, while adjusted earnings per share increased 34% for the year.
Seagate has also made significant investments in new areas to fuel its future growth. The company is investing heavily in new storage technologies. In 2015, Seagate acquired Dot Hill Systems for $695 million, which expanded its reach in cloud-based storage and software. More recently, on June 1, Seagate announced an investment of approximately $1.3 billion in the private equity-led acquisition of the Toshiba Memory Corp. Lastly, the company continues to increase investment in SSDs, particularly in the consumer, gaming and software-as-a-service markets.
For first-quarter 2019, Seagate management forecasts revenue of $2.98 billion, which would represent approximately 5% growth from the same quarter last year. Analyst consensus is for the company to generate revenue of $2.85 billion. The company also expects revenue growth for the upcoming year. As a result, Seagate should continue to generate more than enough cash to sustain its dividend.
A tech stock with a utility yield
Seagate currently pays a quarterly dividend of 63 cents per share, which works out to an annual payout of $2.52 per share. At the recent share price of $51, Seagate has a hefty 5% dividend yield. This is a high dividend yield that is more typically seen in the utility sector, not the tech sector. The company can maintain such a high dividend payout because its business model generates a lot of cash. The dividend is one part of the company’s capital return program—share repurchases are the other component. In fiscal 2018, 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, with plenty of cash left over to invest in growth.
Based on adjusted earnings per share of $5.51 in fiscal 2018, Seagate had a trailing dividend payout ratio of 46%. The company also has a strong balance sheet. It ended the most recent quarter with $1.85 billion in cash on hand and long-term debt of $4.32 billion. The company maintained a net-debt-to-EBITDA ratio of just 1.2 times in the past four quarters, indicating a manageable level of debt. This means Seagate’s high dividend payment is secure, and there could even be room for a dividend increase at some point in the future.
Disclosure: I am not long any of the stocks mentioned in this article.
