Shares of digital memory manufacturer Seagate Technology (NASDAQ:STX) roared 54% higher in 2019, paying investors $0.63 per share each quarter along the way. To kick off 2020, that payout was raised to $0.65 a share, good for an annual yield of 4.4% as of this writing.

Though the stock's rally has priced in an expected rebound in demand for Seagate's wares this year, there are plenty of reasons to still like the stock. Shares are priced reasonably, the next wave of electronics and digital business operation upgrades are coming, and that dividend is a generous bonus along the way. Thus, Seagate is my favorite dividend stock for 2020.

A cloud surrounded by computers, illustrating a data center.

Image source: Getty Images.

Early innings of sales recovery

Manufacturing is a cyclical industry, and digital memory is no exception. Though Seagate's older but cheaper hard disk drive (HDD) technology has helped it avoid the sharper declines of peers like Micron (NASDAQ:MU) and Western Digital (NASDAQ:WDC), the slump in sales brought on by last year's slowdown in data center construction and economic uncertainty due to trade wars has taken a toll.

Period

Revenue

Change (YOY)

Adjusted Earnings per Share

Change (YOY)

Q1 2019

$2.99 billion

14%

$1.70

77%

Q2 2019

$2.72 billion

(7%)

$1.41

(5%)

Q3 2019

$2.31 billion

(18%)

$0.83

(43%)

Q4 2019

$2.37 billion

(17%)

$0.86

(47%)

Q1 2020

$2.58 billion

(14%)

$1.03

(39%)

Forecast Q2 2020

$2.72 billion ± 5%

(5%) to 5%

$1.32 ± 5%

(11%) to (1%)

Data source: Seagate Technology. YOY = year over year.  

However, things are back on the mend and Seagate could return to year-over-year sales growth during its fiscal 2020 second quarter and be close to even on the bottom line when compared to the same period a year ago. The company has seen an uptick in demand for data center HDDs with its high-storage capacity 16-terabyte drives, and new 18-terabyte and 20-terabyte HDDs will begin shipping in early and late 2020, respectively. In addition to data centers, upgrades to laptops, gaming devices, and other consumer products could provide a bump this year. A truce in the trade war between the U.S. and China is also welcome news for the technologist.  

And then there's the longer term, with edge computing just getting started. Applications like AI-based video surveillance and smart factories are only just beginning to be built, and the intense amount of data that needs to be processed and stored bodes well for digital-memory makers like Seagate.  

Low valuation and a generous yield

That all bodes well for the long term for Seagate, but I think it's an especially timely buy right now -- even after last year's big rebound. Sales growth is just beginning to show renewed signs of life, which should equate to higher earnings per share. While some of that rebound in the next year is priced in, not all of it is. Seagate's price to trailing-12-month free cash flow (money left over after operating and capital expenses are paid) is at 16, while expected one-year forward price to earnings is only 11.5. That valuation implies little expansion in earnings in the next year, an unlikely scenario if revenue does start to increase once again.  

Additionally, the company continues to fund share repurchases (270 million shares outstanding at the end of Q1 versus 292 million a year ago, which boosts earnings per share) and the recent dividend payout raise is easily covered by free cash flow. Since digital memory tends to be cyclical, it often pays to scoop up shares of a company like Seagate near the bottom of the sales trough.  

Of course, new demand may not materialize in 2020, which will undoubtedly limit the upside for the stock. However, with the cash flowing to fund share repurchases and a 4.4% dividend yield, even a flat sales performance in the new year could still end up positive for Seagate owners. Thus, the stock is my favorite addition for 2020 for investors looking for juicy dividend payers. I'm a buyer right now.