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Back in 2015 and 2017, I wrote two articles on Seagate Technology Holdings (NASDAQ: STX), focused on its potential as a dividend and income growth play. In both cases the stock was trading at a relatively cheap point on the basis of market pessimism about their chances going forward.
Things went really well. Seagate continues to pay solid dividends, though with the surge in share price the yield isn’t nearly so high as it was way back when. Today I want to look at the company and where it stands so many years later. They are still a prominent market player in the storage industry, but we’ll be considering whether they’re still looking like a cheap play at the higher prices they are now available at.
Consolidated Balance Sheet
|
Cash and Equivalents |
$1.36 billion |
|
Total Current Assets |
$3.33 billion |
|
Total Assets |
$7.74 billion |
|
Total Current Liabilities |
$3.10 billion |
|
Long-Term Debt |
$5.19 billion |
|
Total Liabilities |
$9.23 billion |
|
Total Shareholder Equity |
($1.49 billion) |
(source: most recent 10-K from SEC)
Seagate has a pretty good amount of cash on hand, and is not terribly positioned. Despite that, the company has a fairly large amount of debt, and going forward, there will likely be an effort to pay that debt down. That could impact the ability of Seagate to continue to grow dividends, and indeed we’ve seen the quarterly payouts are not growing rapidly in recent years.
The Risks
Seagate is a market leader in storage, but keeping that position means that they have to keep introducing new products to the market and on a timely basis.
If they don’t, others will, as the storage market is as highly competitive as ever, and companies are constantly looking to one-up one another on the basis of technological improvements or undercut them on price. Seagate has long done well in that competitive market, but there is no guarantee that will continue to be the case.
Hyperscale data center companies are a big part of Seagate’s business, and if those companies decide to delay key products, Seagate could be at a risk of slowing business, and weakening prospects.
All in all, Seagate depends on strong spending in the cloud and enterprise businesses. The business isn’t mostly the sale of retail-level hard drives that they were decades ago, and they are much more dependent on the enterprise side of things.
Statement of Operations
|
2021 |
2022 |
2023 |
2024 |
|
|
Revenue |
$10.7 billion |
$11.7 billion |
$7.4 billion |
$6.5 billion |
|
Operating Income |
$1.5 billion |
$1.9 billion |
($342 million) |
$452 million |
|
Net Income |
$1.3 billion |
$1.6 billion |
($529 million) |
$335 million |
|
Diluted EPS |
$5.36 |
$7.36 |
($2.56) |
$1.58 |
(source: 10-K from this year, last year from SEC)
As you can see from the data, Seagate has had a couple of years of struggle as demand went through a cyclical downturn. Either way, this isn’t the 1990s, and Seagate’s business isn’t growing dramatically going forward. This is now very much a maturing industry, and the company’s value needs to reflect that.
Estimates are that the company will be recovering as spending does. The 2025 revenue is expected to be $9.15 billion, with a $6.65 earnings per share. That would give us a forward P/E ratio of 14.97. That’s not a terrible value for a company with such a strong reputation and history. 2026 gets a little better, with revenue of $10.36 billion, and an earnings per share of $8.85.
Free Cash Flow and the Dividends
|
2021 |
2022 |
2023 |
2024 |
|
|
Operating FCF |
$1.63 billion |
$1.66 billion |
$942 million |
$918 million |
|
Investing FCF |
($466 million) |
($352 million) |
$217 million |
$126 million |
|
Financing FCF |
($1.67 billion) |
($1.90 billion) |
($988 million) |
($473 million) |
(source: 10-K from this year, last year from SEC)
Reflecting the company’s relatively strong cash position, Seagate generates quite a bit of operating cash flow, especially when business is good. That’s good news, because a company that has a fairly substantial amount of debt needs to continue to service it and hopefully pay it down ahead of schedule.
Seagate has grown its dividend a bit since I last covered the company years ago, though the rate of growth has slowed down a bit as the company went into a weak cyclical period. Right now they are paying 70¢ per quarter, which at current prices gives us a yield of 2.87%. That’s not bad, though clearly it was a lot more impressive when the stock was only a fraction of current prices. It is almost double the yield of median peers.
The good news is that with the company generate a lot of cash annually, the current yield is not in serious risk, and even if there are probably bigger priorities than increasing the amount paid out in future years, that’s not a bad situation investors will find themselves in.
Conclusion
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After surging in price since I wrote about it in 2017, Seagate is no longer the streaming buy it once was. That said, I’m still going to rate it as a buy at current levels, and I’ll tell you why.
Storage is a very important part of the digital economy, and Seagate is in a great market position to continue being a leader in that industry. I don’t mind paying the current levels of earnings and getting the current yield, especially since both are better than their peers. While there are obviously risks, the downside seems manageable, and is mostly based on the company having to continue to service its debt.
Like I said, I’m rating it a buy, but I would likely look for a lower price for a new entry position. That’s not to say that I believe the stock is going to drop to a more appealing price, but if it does I would be very interested.
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