Seagate Technology Dividend Stock Analysis

Jul.23.12 | About: Seagate Technology (STX)

For those who follow my dividend holdings, you probably noticed that I have sold ZWB and bought STX not so long ago. I've already shared my disappointment in ZWB and decided to move on quickly. When I sold ZWB, I was down by about 12% (loss of $251.38 after dividend payments). STX is almost getting this loss back after 6 weeks since the trade (I'm currently +$235 at the moment of writing this post). I wasn't expecting to make a quick profit on this stock as I think I can get a lot more with Seagate Technology. Let me tell you how.

Seagate Technology Stock Description:

Seagate Technology is the largest hard disk manufacturer with 35% in market share. Their range of production goes from desktop to laptop and from servers to workstations. STX has great expertise in storage data and includes backup system services and digital video recorders (DVRs). It is also present in online backup services. STX surely has a lot of competitors in this industry. The most important are Western Digital (NASDAQ:WDC), Hitachi, Samsung (OTC:SSNLF), Toshiba (OTCPK:TOSBF) and SanDisk (SNDK).

Seagate Technology Stock Graph

STXClick to enlarge

Seagate Technology Ratios and Financial Info:

Ticker STX
Name Seagate Technology PLC
Dividend Metrics
Current Dividend Yield 3,63
5 year Dividend Growth 17,75
1 year Dividend Growth 39
Company Metrics
Sales Growth (1 year) -3,72
Sales Growth (5 year) 14,87
Earnings growth N/A
P/E ratio 6,15
Margins growth -3,37
Payout ratio 31,77
Return on Equity 19,7
Debt to Capital Ratio 0,24
Click to enlarge

Seagate's financial metrics are quite interesting. The dividend yield and dividend growth are pretty strong. Most of the dividend growth comes from the past 12 months when STX has adopted an aggressive dividend increase paired with a $2,5G stock repurchase plan. With such a low P/E ratio (6.15) and forward P/E ratio (around 2.9), we understand why STX is more interested in purchasing its own stocks. The company's payout ratio is also quite reasonable and provides room for dividend increases in the future. The debt to capital ratio is quite low as well. Definitely, the present situation of the company looks good.

Seagate Technology Technical Analysis

STX technical analysisClick to enlarge

STX is trading on an uptrend.

Upcoming Opportunities and Dangers:

While the current financial metrics around Seagate look great, the future is uncertain. There is a reason why the P/E ratio is so low; some investors believe in the death of the PC. The main problem for STX is similar to Intel's (NASDAQ:INTC). Both companies are leaders in their industry (hard drives and processors) but they are both directly related to PCs. Mobiles and tablets are lurking towards flash memory to store their data. The difference between hard drives and flash is huge. Hard drives include mechanical parts, use more power and flash drives are also less likely to break. On the other hand, flash memory is not as powerful as hard drives and is costly. So far, hard drives are also faster than flash technology. Unfortunately, you can bet that as technology advances, these disadvantages will disappear to the profit of a strong and faster flash drives. This is how Flash memory could eventually replace hard drives.

STX recently decreased its forecast for Q4 2012 in a similar way that Intel did after releasing strong results last week. However, both stocks rose on the day. This shows that the market knows about upcoming dangers but still believes that computer-related companies are strong enough to evolve at the same speed as technology does. STX has made a few recent acquisitions in order to boost its cloud computing division. This is another growing market to develop.

Final Thoughts on Seagate Technology

I've bought STX for a few reasons. The first one was the low P/E ratio paired with a solid balance sheet. The company has a lot of cash to make acquisitions and develop other technologies in order to face flash memory future domination. I also believe that if STX continues to post strong results as it did in the last 18 months or so, investors will increase the P/E multiple for this company. I don't expect a P/E ratio of 15 but I'm pretty sure it can reach 8-9. This would add a nice percentage to my investment return. In the meantime, the company is doing well presently and paying a strong dividend. This is enough to keep me waiting for a while.

The bet on STX is simple; I think the company will continue to sell hard drives and that it is strong enough to evolve over time. On top of that there are 24 analysts following the stock and their average growth forecast is 30%. Not bad for a "supposedly dying" company?

Disclosure: I'm long STX and sold my positions in ZWB a month ago.