The Puzzling Net Payout Yield Of Seagate Technology

Sep. 9.12 | About: Seagate Technology (STX)

When Seagate Technology (NASDAQ:STX) reported earnings back on July 30th, it confirmed that the company had completed a massive buyback of 45M shares for $1.25B. The puzzling part is that the company spent over $27 a share for a stock that traded below $10 for a few days back last October. Why load up now?

The company is a worldwide leader in hard disk drives and storage solutions.

Seagate actually ended the quarter with sequentially higher cash showing that the buyback was at least from cash generated from operations. A good example that the stock was trading considerably below the ability to generate cash if the company bought back 10% of the outstanding stock in one quarter alone.

Q4 2012 Highlights

The company reported the following highlights for Q2:

  • Reported revenue of $4.5B versus $2.9B last year.
  • Reported gross margins of 33.6%.
  • Reported diluted earnings per share of $2.41 versus $0.27 last year.
  • Generated cash from operations of $1.4B.

As mentioned above, the most impressive part of the earnings report was the ability to generate a massive $1.4B in cash for the quarter.

Net Payout Yields

As detailed in the September list of top Net Payout Yield (NYSE:NPY) stocks, Seagate made the top ten for the first time due to the strong buyback program. Read the article for more details on the NPY concept. In essence the combined dividend yield and buyback yield provides for a compelling investment in the same way that a high dividend yield is appealing.

Seagate though is abnormal in that the high yield usually occurs from a falling stock that juices up a dividend and encourages a higher level of stock buybacks. In this case, the company actually bought stock at higher and higher prices. As can be seen in the below charts, the NPY increased with the stock price. In fact, the company bought the majority of the stock over the last year after it had more than doubled from $10 last October to $20 by February.

Net Payout Yield - Seagate Tech

Click to enlarge

As shown above, the company bought over 88M shares for nearly $2B or approximately 19% of the outstanding shares during the first six months of the calendar year.

The diluted share count dropped to 427M from 463M last quarter suggesting a substantial drop should occur in the share count for the Q1 2013 earnings report. That reduction could help juice earnings in the next quarter.

STX Total Return Price Chart

STX Total Return Price data by YCharts

Valuation

While investing based on the NPY theory suggests not even reviewing the fundamentals, those also appear compelling. The stock trades at only 4.5x forward earnings. It also trades at less than 1x sales. Both valuations are very cheap, especially for a company with that ability to generate cash.

Conclusion

While Seagate fits the NPY pattern of operating in an under appreciated sector, hard disk drive storage, the company is at odds with the normal NPY stock. It currently trades near 52-week highs and more than triple the 52-week lows.

As an example, Gap (NYSE:GPS) previously ranked in the top ten NPY stocks, but recently dropped off the list after a similar stock run this year. In fact, the stock has surged so much that the company isn't able to generate the cash in order to support a large buyback anymore.

The Gap example highlights the beauty of the NPY concept. It typically encourages buying low and selling high. Oddly, Seagate is that one company that violates that conventional wisdom suggesting buying high and selling higher.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please consult your financial advisor before making any investment decisions.