Western Digital Hard Drive. Source: Western Digital

Storage giant Western Digital (NASDAQ:WDC) doesn't have much of a history as a dividend payer. The company instituted its dividend less than four years ago, announcing its first dividend in Sept., 2012. But since then, Western Digital has hiked its dividend three times, and in the process, has become quite a stock for income-seeking investors. Currently, Western Digital shares yield an attractive 4.4%.

But Western Digital's core business -- the sale of traditional hard drives -- appears challenged by technological change and slowing demand, and its proposed acquisition of high-flying peer SanDisk (NASDAQ: SNDK) could undermine its balance sheet. What's more, that high dividend yield has been driven more by a collapse in share price (down more than 55% in the last 12 months) than a soaring payout, as investors have begun to doubt the fundamentals of Western Digital's business. Let's take a closer look at Western Digital to see if investors should expect a dividend hike in 2016.

Dividend stats on Western Digital

Current Quarterly Dividend Per Share

Current Yield 4.41%
Number of Consecutive Years With Dividend Increases 3 years (since 2013)
Payout Ratio 31.47%
Last Increase April 2015

Data source: Yahoo! Finance. Last increase refers to ex-dividend date

A commitment to capital returns
Western Digital instituted its dividend in the midst of a slowdown in its business. Declining PC shipments, coupled with the rise of ever more affordable solid state drives, created doubt about the validity of Western Digital's long-term prospects. At the time, the company said it would aim to return about 50% of its free cash flow to shareholders through dividends and stock buybacks. Since then, Western Digital has boosted its dividend and bought back billions of dollars worth of stock.

Western Digital remains profitable, and has billions in the bank. In its fiscal year first quarter, Western Digital generated $394 million of free cash flow, and ended the quarter with $5.1 billion of cash. It paid out $115 million to shareholders in the form of dividend payments. Barring a sharp downturn in its business, continued dividend payments with regular increases seem likely.

Taking on debt to buy SanDisk
Or at least they did until last October, when Western Digital announced it would be acquiring SanDisk for about $18.9 billion. Western Digital plans to finance the acquisition through a combination of cash, common stock, and debt. Western Digital expects to take on $18.1 billion of new debt facilities in connection with its SanDisk purchase. Immediately following the announcement, Western Digital suspended its share repurchase program, despite having a $2.1 billion authorization left.

The deal doesn't look all that bad for Western Digital's balance sheet, however, as China's Unisplendour is slated to infuse the hard drive-maker with billions of dollars. Last September, Unisplendour announced a deal to acquire 15% of Western Digital for about $3.8 billion, buying newly issued common stock.

Yet the fate of both deals remains in jeopardy. Western Digital and Unisplendour must first gain the approval of the U.S. Committee of Foreign Investment in the United States (CFIUS). Earlier this month, the CFIUS blocked Philips' planned sale of its lighting business to a group of Asian buyers, and it could do the same to Western Digital. To complicate matters further, Unisplendour's vice chairman and president Qi Lian recently resigned.

If the Unisplendour deal falls through, the terms of Western Digital's acquisition will change, and its shareholders will have to approve the merger with SanDisk. That might prove difficult, given that, after the deal was announced last October, Western Digital shares plunged.

Ignoring the ongoing shifts in the storage business, Western Digital's fate seems complex and multifaceted, and it's difficult to say whether or not Western Digital will raise its dividend yet again in 2016. With such a high yield, Western Digital appears attractive to income-hungry investors, but don't count on regular increases.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.