Source: Seagate Technology.
When most dividend investors think about where to find promising stocks, the technology sector isn't the first place most of them look. Yet despite a reputation for stinginess in the dividend department during the 1990s and 2000s, tech stocks have recently made a big splash with payout increases, and hard-disk drive specialist Seagate Technology (STX) has demonstrated its commitment to rewarding shareholders over the past 10 years with rising dividends, albeit with some hiccups along the way.
Seagate is best known for its position aside peer Western Digital (WDC -1.27%) as the biggest players in the hard-disk drive market. Yet as the PC has given way to mobile devices that use storage devices based on other technologies, Seagate hasn't let the pace of innovation leave it behind. Let's look at three reasons Seagate has the potential to be a top dividend stock for years to come.
1. Seagate has an impressive dividend history but has periodically gone through challenges
Seagate has followed the same general pattern that tech investors have seen more broadly in the past decade, as maturing companies realize that returning capital to shareholders through dividends has broad appeal. From modest beginnings in 2003 with a roughly 1% yield, Seagate steadily boosted its payout over the years, paying quadruple that initial amount by 2008.
STX Dividend data by YCharts
Yet one thing dividend investors never like to see is for a company to suspend its payouts, and that's exactly what Seagate did from early 2009 through 2011. The financial crisis forced Seagate to stop paying dividends for the two-year period to preserve cash, with anticipated savings of $60 million making a meaningful difference to the drive maker's cash flow. Yet in 2011, Seagate returned to dividend-paying status with a vengeance, making up for lost time with a payout half again as large as its pre-suspension amount and then more than doubling that amount in less than three years. At current levels, Seagate's yield is 2.9%, almost twice what Western Digital pays.
2. Seagate's traditional hard-disk drive business has found new life
Source: Seagate.
For years, many industry analysts looked at the trend toward falling PC sales and declared that companies that relied on PC technology were doomed to obsolescence. In the long run, that might be true, but other PC-reliant companies have recently reported a renaissance in desktop-computer demand. That bodes well for ongoing demand for Seagate's historically strong hard-disk segment.
In addition to overall PC demand, Seagate has found ways to market its hard drives for other applications. In particular, the push toward data analytics has led to a huge increase in the need for storage capacity among large enterprises, and finding the right mix between cost-effectiveness and easy access has given new life to the traditional hard-disk drive space. Even as technology presses forward, Seagate should see a constant stream of cash from its less exciting storage products, and that should provide valuable cash flow to finance dividends well into the future.
3. Seagate has evolved toward newer storage technology
Source: Seagate.
Seagate isn't just banking on the hard disk drive to provide its future revenue. Recent acquisition moves have bolstered its position in the enterprise storage segment, with Seagate's purchase of the LSI flash business of Avago Technology earlier this year helping the drive-maker build up its presence in the solid-state drive arena. With a cheaper source of flash components, Seagate should be better able to compete in solid-state drive production, which most analysts expect to soar in the coming years. Western Digital believes that the enterprise solid-state market will more than double in shipment volume between now and 2017, and although cost reductions will make revenue grow at a slightly slower pace, there's clearly plenty of growth prospects in newer storage technologies.
Seagate Technology isn't necessarily the first place investors would look for a top dividend stock. But with an attractive combination of strength from its existing core hard-disk drive business and growth potential in newer technologies, Seagate is worth a closer look for those seeking both current income and possible higher stock prices in the future.
