Seagate Technology PLC vs. Western Digital Corp.: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, the world's two largest hard disk drive manufacturers (forming an effective duopoly), will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Founded in 1979, Seagate Technology PLC (NASDAQ: STX  ) , originally known as Shugart Technology, is the world's largest maker of hard disk drives (HDDs) and data storage solutions. Seagate developed the first 5.25-inch HDD in 1980 and has remained a dominant supplier to the PC industry ever since. Headquartered in Cupertino, Calif., Seagate currently employs more than 50,000 people working round the clock to produce HDDs for PC manufacturers and independent distributors around the world. The company generates 70% of its revenues from PC makers, and around three-quarters of its sales are made outside the U.S. due to the high concentration of PC manufacturing capacity in Southeast Asia.

Established in 1970, Western Digital Corp. (NASDAQ: WDC  ) , formerly known as General Digital, is the second-largest hard disk drive manufacturer in the world. The company nearly vanished in the 1970s before striking gold with its early microchip products, a success that allowed it to expand into data storage by providing controller components for disk drives. Western Digital has aggressively expanded its R&D and manufacturing capabilities, products portfolio, and geographical footprints with the acquisition of Hitachi Global Storage Technologies, and today, the company generates roughly 60% of its revenue from PC manufacturers and more than half of its sales from the Asia-Pacific region.

Statistic

Seagate

Western Digital

Market cap

$17.6 billion

$20.9 billion

P/E ratio

12.0

20.5

Trailing-12-month profit margin

11.6%

6.9%

TTM free cash flow margin*

13.9%

14.3%

Five-year total return 

1,220%

428.1%

Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round 1: Endurance (dividend-paying streak)
According to Dividata, Seagate began paying quarterly shareholder distributions in 2003, but it ceased payments from mid-2009 to early 2011, which gives it a mere three-year dividend-paying streak. That's still an easy win for Seagate over Western Digital, which only began paying quarterly dividends in mid-2012.

Winner: Seagate, 1-0.

Round 2: Stability (dividend-raising streak)
Seagate's halted dividend payments resumed with a vengeance in 2011, and the company has boosted payouts each year, which is still enough to snatch away the stability crown from Western Digital, which first raised payouts over its initial rate late last year.

Winner: Seagate, 2-0.

Round 3: Power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

STX Dividend Yield (TTM) Chart

STX Dividend Yield (TTM) data by YCharts.

Winner: Seagate, 3-0.

Round 4: Strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.

STX Dividend Chart

STX Dividend data by YCharts.

Winner: Seagate, 4-0.

Round 5: Flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

STX Cash Dividend Payout Ratio (TTM) Chart

STX Cash Dividend Payout Ratio (TTM) data by YCharts.

Winner: Western Digital, 1-4.

Bonus round: Opportunities and threats
Seagate may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Seagate opportunities

Western Digital opportunities

Seagate threats

Western Digital threats

  • Seagate's acquisition of hard-drive testing specialist Xyratex turned Western Digital into one of its major customers.
  • Western Digital has no plans to produce 3D NAND despite a booming market.

One dividend to rule them all
In this writer's humble opinion, it seems that Seagate has a better shot at long-term outperformance, thanks to a long-term product strategy that includes cloud and big-data uses as well as the explosively growing 3D NAND flash memory market. However, Western Digital's ability to grow its market share is a worrisome indicator for Seagate shareholders, who should keep a close eye on Western Digital's product portfolio and sales strategies. The beleaguered PC market will continue to trouble both manufacturers in the near future, so the ultimate victor is bound to be the one that best transitions toward a post-PC world. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!

Looking for other dividends to buy today?
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


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  • Report this Comment On March 24, 2014, at 10:39 PM, xunil wrote:

    You forgot to mention - Seagate drives are horrible.

    They completely ruined Maxtor. In our DC we experienced Seagate's lack of quality. We are replacing 1-2 a week. In my home office, my FreeNAS box just had 3 Seagate drives fail over the course of 3 months. Western Digital and Hitachi (WD owned) are the only drives to buy for real world usage.

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