Seagate Technology PLC: This High-Dividend Stock Yields 7%
November 6, 2016
Earn 7% From This High-Dividend Stock
When dividend investors start their search for high-dividend stocks, they typically look in the same sectors: real estate, pipelines, and royalty companies. One sector that many investors want exposure to, but find it difficult to earn a yield in, is the technology sector. Investing in the technology sector is difficult because it is all about the future direction of technology and business strategies based on predictions.
Seagate Technology PLC (NASDAQ:STX) is one stock in the technology sector that would be put into the group of high-dividend stocks. Seagate’s main business focus is to develop, produce, and distribute data storage. The company gives investors access to the growing cloud storage business as well, which is what data storage as a whole is moving towards.
Over the past few years, Seagate has been taking a long, hard look at its business strategy and making adjustments accordingly. Shareholders were not forgotten along the way, as they were rewarded by the dividend. Let me explain.
Dividend and Share Repurchases
Seagate has seen both the ups and downs of the technology market, having been in business since 1978. Since 2003, it has been a dividend stock, and today is recognized as a high-dividend one. The dividend has grown over this period 2,100%, from $0.12 to $2.52 annually. The current yield on the stock is 7.65%, based on the current trading price of $32.92.
This is not the only way management is returning cash to shareholders. In April 2015, the board of directors authorized a share repurchase plan of $2.5 billion. At the time of the announcement, the market cap for Seagate was $18.0 billion, meaning the share repurchase was for 13% of the outstanding shares. When a company repurchases shares, it believes the market is discounting the share price. In this case, the excess money on the balance sheet was best sent on repurchasing shares. (Source: “Seagate Technology Announces New $2.5 Billion Share Repurchase Authorization,” Seagate Technology PLC, April 22, 2015.)
Seagate was not quite done yet, as it continues to repurchase shares, buying back $10.0 million worth in the first quarter of fiscal 2017. A large reason for the buybacks is because the gross margin for the company is a strong 29.5%, which is the highest gross margin it has seen in the last eight quarters. The balance sheet has $1.5 billion in short-term investments and cash equivalent, in part thanks to cost-cutting initiatives. (Source: “Fiscal Q1 2017 Supplemental Financial Information,” Seagate Technology PLC, October 19, 2016.)
Management Is Focus on Running a Lean Business
Based on current data, Seagate is focused on running a much leaner company and cutting costs where it can. Over the past two years, the head count has decreased by 18%, which is one of the reasons for the increase in dividends. The cash conversion cycle number reflects a 40% improvement for the company. What this tells investors is how quickly resources are converted into cash flow.
Thanks to the company’s hands-on approach, earnings were up 85% compared to the same quarter in the previous year. Since shares of STX stock hit their low of $18.72 in May, the shares have risen 75%. (Source: Ibid.)
Analysts believe the shares have more upside from the current price due to the execution of business operations. The average target price is $38.49, which would be an estimated 16% return. Once the dividend of 7.65% is factored in, in the estimated target price of the return would be just over 23 %.( Source: “Seagate Technology PLC,” MarketWatch, last accessed November 4, 2016.)
Final Thoughts on STX Stock
All of this makes Seagate one of my favorite high-dividend stocks. It is rare to find a company that is in the technology sector with a product or service that is still relevant. As Seagate focuses more on the bottom line, investors can look at their own bottom line by earning a yield from this high-dividend stock.
