Stock of the Week
Nasdaq Symbol: STX
Industry: Disk Drives
Price as of 12/5: $27.60
With the completion of the recent election, one thing is for sure, taxes are going up next year particularly for dividends. The averages initially sold off following the election hitting all the top dividend playing sectors like REITS, bonds, and some high yielding stocks. Since then the averages have bounced back. No matter how high the tax rate goes, investors still need income and will continue to buy income producing products. The recent theme with dividends is to move the next quarterly dividend into December to take advantage of the lower tax rate. Some companies are initiating special one-time dividends as well. This week we'll highlight a tech stock down 30% from their August highs, but mentioned positively in Barrons over the weekend. The stock of the week is disk drive maker, Seagate. Outside Google and Apple, the tech sector has taken it on the chin of late particularly among companies with PC exposure. Seagate is one of those companies, but the fundamentals and earnings remain strong thanks in part to cloud computing. Intel is another blue chip in the same dilemma. Seagate is not a conservative investment, but with a recent dividend hike raising the yield to 5.4%, investors willing to take on some risk for a growth and income play, should take a look at the disk drive maker.
With a hefty dividend in a sector known for stable earnings, investors are reticent to step up to Seagate. Hard disk drives are incredibly cheap on a per-gigabyte basis while hard disk drives typically cost $0.03 - $0.05 per gigabyte, solid state drives will run from $0.50 - $1.00 per gigabyte. Clearly for a large database or web-server, going pure solid state is not economically viable. Having the two work in tandem - with the hard disk holding the data and a flash solution acting as a cache - is the solution that seems to be working now and what will be working for the foreseeable future. In the client space, this hybrid solution looks like the mainstream solution. For example, in the Ultrabook sector a small solid state drive paired with a large hard disk drive or a hybrid drive that contains both NAND flash built into the same package as the magnetic disk platters. The hybrid solutions are fast and give nearly the same performance as the pure solid state drive products, making them an attractive option for those who want both speed and bulk storage without compromise.
As long as earnings hold up, the stock will take care of itself. The dividend has been growing at a fairly rapid clip. At the beginning of 2012, Seagate paid $1.25/share on an annualized basis. Of course, management saw fit to increase the dividend earlier this year to $1.28/share annualized. And, on 11/29, Seagate once again announced another dividend hike to today's $1.52 annualized. This is some very high-powered dividend growth. It seems too good to be true, but is it? Well, in the current trailing twelve month period, Seagate earned $7.52/share, meaning that the payout ratio is a modest 20.2%. More importantly, the company generated $3.5 billion in free-cash-flow over the last 12 months.
Currently, 55% of full year 2013 free cash flow (FCF) goes to buybacks and 15% to dividends. So even today's 5.4% dividend yield is quite conservative compared to what could potentially be paid out. More importantly, with such aggressive buybacks, the total payout per dividend shrinks, meaning that even if the actual amount paid total remains fixed, investors get a larger piece of that pie.
Besides the 5.4% dividend, Seagate trades for 5 times earnings, 0.6 times sales, and 2.7 times book value. The mass storage industry is not going away thanks in part to the cloud computing space. Seagate is generating gobs of free cash, aggressively buying back shares, and is run by solid management that has been very generously upping the dividend at every chance it gets. Seagate is not a conservative stock, but with a 30% pullback and a 5.4% dividend with an ex-dividend date coming up, Seagate is a good growth and income stock to consider.