David Einhorn's Favorite High-Dividend Stock

| About: Seagate Technology (STX)

By Jake Mann

In the hedge fund world, there aren't too many money managers that are more well known than David Einhorn. Einhorn, the manager of Greenlight Capital, has attained "rock star" status due to a number of high-profile short sales, including Lehman Brothers, Green Mountain Coffee Roasters (NASDAQ:GMCR) and Chipotle (NYSE:CMG). It's worth noting, though, that Einhorn has also amassed quite the long equity portfolio, as seen in his 13F filings with the SEC.

At Insider Monkey, we track these filings, which indicate that Greenlight Capital had 13F holdings worth a little over $6 billion at the end of the third quarter. Here's Einhorn's full equity portfolio. While you may have known that the hedge fund manager has a penchant for tech stocks--his No. 1 holding is Apple (NASDAQ:AAPL) and over one-third of his 13F is invested in the technology sector--Einhorn also has investments in high-dividend stocks.

We're going to take you through his top stock pick for serious income investors; it wouldn't be a bad idea to consider adding it to your portfolio. After all, our research shows (see Beat the Market by More Than 20 Percentage Points by Imitating Hedge Funds) that investors can outperform the broader indices by imitating the smart money. Let's get started.

Einhorn's No. 2 pick in his 13F portfolio is Seagate Technology (NASDAQ:STX), which currently pays a projected dividend yield of 4.8%. The company, which made over $14 billion in revenues between June 2011 and June 2012, primarily focuses on hard disk data storage. In terms of market share, Seagate holds a 42% stake of the HDD space, second to only Western Digital (NYSE:WDC) at 45%, according to data from IHS.

Zacks is quick to point out that Seagate's chief bullish thesis, at least qualitatively speaking, is that "mobile and consumer electronics markets offers substantial incremental growth opportunities," and we'd have to agree. The sell-side forecasts Seagate's earnings to grow a modest 14.5% over the next five years, which is far above what's expected of Western Digital (4.8%) during this time. Moreover, the markets are also giving STX at a much cheaper growth valuation--PEG of 0.29-- compared to Western Digital, which sports a PEG near 1.2.

Other industry peers like EMC Corporation (EMC), NetApp (NASDAQ:NTAP) and SanDisk (SNDK) also trade at more expensive earnings growth multiples, the lowest of which--SNDK--is still far more expensive than Seagate with a PEG of 1.2. Interestingly, this trio is expected to see EPS growth of 14-15% a year over the next half-decade on average, nearly identical to Seagate's forecast. The difference, though, that investors can capitalize on is that the latter is being treated like a low-growth stock when, frankly, it isn't.

Looking at that dividend yield in particular, which is much more generous than Western Digital's yield of 2.4%, we can see that at a payout ratio near 20%, Seagate has the capacity to fatten shareholders' wallets if it so desires. According to its last 10-K, the company was sitting on a little over $2 billion in investable cash in June, and close to three-quarters of this asset base was in high-liquidity investments like money market funds and commercial paper.

While investors did receive a modest dividend boost at the end of last year, it's certainly possible we'll see an even better yield by the end of 2013. In absolute terms, Seagate has nearly quadrupled its payout since the start of 2008, so a bullish historical precedent has been established.

Obviously, Seagate and Western Digital have high exposure to the PC business, which is in secular decline according to likely everyone but the "I'm a PC" spokesman from the humorous Apple commercials of years past. It's tempting to ignore the consolidative efforts of Seagate in recent years, having acquired Samsung's HDD business in 2011, but ardent investors should pay close attention. This is a move CEO Steve Luczo called "an exciting time in the industry with rapidly evolving opportunities in many markets including mobile computing, cloud computing, and solid state storage."

In addition to simply expanding Seagate's presence in emerging markets like China, Brazil and Russia, the deal also helped the company boost its presence in the mobile storage arena. This represents the key growth driver for Seagate moving forward, and is what can help the stock meet the Street's earnings forecast mentioned above.

Earlier this week, at the Consumer Electronics Show, Seagate shed some light on "the next evolution of the company's wireless storage category," according to eWeek. Dubbed the Wireless Plus, Seagate's newest entry into the mobile storage space "is designed to stream content wirelessly for up to eight smartphones or tablets with enough space for up to 500 high-definition movies."

While this isn't Seagate's first entry into the space--that came in 2011-- the latest Wireless Plus gives users the ability to "wirelessly upload" content from mobile devices. Access on the iPhone, for example, will come through the Seagate Media app, which is free to download. The Wireless Plus itself costs $199.99 for the 1 TB version.

It's clear that a continued presence in this industry presents the best growth opportunity for Seagate, and at its valuation and healthy dividend yield, investors of all philosophies can find something to like about the stock. Certainly, we can see why it is Einhorn's No. 2 stock pick behind Apple. For a complete look at the hedge fund industry's interest in Seagate, check out the stock's page on Insider Monkey.

Disclosure: I am long AAPL.

Business relationship disclosure: This article is written by Insider Monkey's writer, Jake Mann, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.