My investment thesis on NetApp (NASDAQ:NTAP) for a while now is that the storage vendor is in the process of a transformation with a loaded balance sheet that offers yield support. The company continues scrapping along the bottom with repeated disappointing earnings.
The interesting point is that FQ4 results again disappointed and the stock hardly budged. Most importantly, NetApp again provided light guidance for the next quarter and the stock bounced sharply to only end down 2.4% on the day. NetApp trades far from the previous lows thought the outlook hasn't improved.
Was this quarter finally a turning point for NetApp shareholders?
The story with NetApp remains multi faceted. The market fears the company has a business in perpetual decline while the company has a large cash balance and solid cash flows to support the large capital return programs.
The biggest catalyst for the stock would be a rebound in revenues. In this category, the problem remains that product revenue is collapsing with a 17% decline YoY in FQ4. The only stability during the last quarter was maintenance and other services categories that were basically flat.
As with a lot of techs, the market transforming to cloud services is killing legacy revenues and replacing them with smaller revenue streams going forward. The end result is a company in a sustained transformation that might leave the revenue base flat to down for years.
The stabilizing force remains the yield support. For the last quarter alone, NetApp returned an incredible $313 million to shareholders after generating $345 million in cash from operations. Maybe more important to yield investors, NetApp increased the quarterly dividend by 6% to $0.19. The new dividend is payable on July 26 and provides a 3.1% yield based on the stock decline to $24.90 in Thursday's trading.
Whether or not investors like stock buybacks, NetApp now offers those investors the sizable dividend yield. Those that like buybacks, especially with a stock trading close to multi-year lows, the stock continues to offer one of the largest capital return programs in the market.
During FY16 that ended in April, the storage company repurchased an incredible $960 million worth of stock for a company only worth a meager $7.3 billion now. Consequently, the net payout yield that adds the net stock buyback yield plus the dividend yield has soared to record levels.
NetApp ended the year with $5.3 billion of cash on the balance sheet. Even taking into account roughly $2.35 billion in debt, the company has nearly $2.0 billion of net cash to continue the large capital returns aided by ongoing positive cash flows.
The key investor takeaway is that product revenues aren't likely to improve much in the next year, but the stock is too cheap to pass up.
Disclosure: I am/we are long NTAP.
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.
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