Seagate Technology (NASDAQ:STX) stock has shed about a fifth of its value this year as the novel coronavirus (COVID-19) pandemic slammed the broader markets. Investors also likely wondered if the abrupt slowdown would throttle the hard drive maker's growth and put its forward dividend yield of 5.2% at risk.

I once called Seagate an undervalued dividend stock, but that was before the pandemic turned the markets upside down. Let's take a fresh look at Seagate's core business and dividend to see if it's still a smart income investment in a volatile market.

A platter-based hard disk drive.

Image source: Getty Images.

Reevaluating Seagate's business

Seagate's revenue has declined annually for five straight quarters due to sluggish sales of its traditional platter-based HDDs (hard disk drives) to PC manufacturers and data centers. But those declines eased up over the past two quarters, and its non-GAAP gross margin improved sequentially last quarter.

Period

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

YOY Revenue Growth

(7%)

(17%)

(16%)

(14%)

(1%)

Non-GAAP Gross Margin

29.9%

26.8%

27.1%

26.7%

28.7%

YOY = Year-over-year. Source: Company quarterly reports.

Those figures indicated Seagate had finally passed a cyclical trough. In early February, Seagate estimated its third-quarter revenue would rise 17% annually, with 45% growth in non-GAAP earnings.

Seagate noted that it didn't anticipate a "material impact" from the coronavirus at the time, but widened its guidance range (+/- 7% for both revenue and earnings) to reflect those uncertainties. Seagate hasn't updated its guidance since then, but most analysts remain neutral or bullish, with an average price target of $56 on the stock.

Baird analyst Tristan Gerra, who recently upgraded Seagate from Neutral to Outperform with a price target of $60, believes that HDD market prices will remain resilient throughout 2020 with robust demand from servers and that Seagate will likely boost its market share and gross margin in the second half of the year.

Memory chipmaker Micron's (NASDAQ:MU) recent results support that thesis. Micron stated that it was already seeing supply shortages in the data center market throughout the pandemic due to the surging usage of remote work, gaming, and e-commerce activities. It also expects to sell more chips to PC manufacturers as they ramp up the production of notebooks to address consumer demand. These tailwinds could bolster Seagate's business throughout the crisis.

How safe is Seagate's dividend?

Seagate spent 57% of its free cash flow on its dividend over the past 12 months. By comparison, Seagate's main rival Western Digital (NASDAQ:WDC) spent more than 100% of its free cash flow on its dividend over the past 12 months. Seagate's free cash flow growth has remained fairly stable through cyclical slowdowns over the past decade as it focused on less capital-intensive HDDs instead of pricier SSDs (solid state drives) like Western Digital.

STX Free Cash Flow Chart

Source: YCharts

Seagate's dividend looks safe for now, but we should remember it suspended its dividend from 2009 to 2011 in the aftermath of the Great Recession. It raised its payout last year, but that was its first dividend hike since 2015 -- so investors shouldn't consider it a dividend growth stock. Western Digital hasn't raised its dividend since 2015.

Seagate notably spent over 100% of its free cash flow on stock buybacks over the past 12 months, which is a fairly common practice for mature tech companies treading water during a cyclical downturn. If the coronavirus crisis deepens and throttles its free cash flow, Seagate can still suspend its buybacks to protect its dividend.

Is Seagate a reliable income stock?

Seagate's cyclical rebound should continue -- even as the coronavirus crisis disrupts supply chains and consumer spending -- due to pent-up demand from the PC and data center markets. Those tailwinds should persist throughout the rest of the year, boosting its free cash flow and supporting its generous dividend. Its forward P/E ratio of 9 should also set a floor under the stock, which makes it a solid income investment for uncertain times.