Is Seagate Dividend Worth Buying?

Shares of Seagate Technology Holdings plc (NASDAQ:STX) are up 13% over the past twelve months on the back of positive developments.

For example, in January, Seagate also introduced the Mozaic 3+ hard drive system, which uses heat-assisted magnetic recording (HAMR) technology. The new technology offers high storage space densities, achieving over 3TB per disk slice. 

A month later, Seagate made public its new online shopping site launch in the United States. The portal enables customers to buy Seagate’s top storage items directly and is intended to strengthen connections with buyers. It also facilitates the rollout of special offers and deals to boost demand.

Furthermore, the Mozaic 3+™ platform is appealing to cloud service providers and customers from data centers, resulting in higher sales and a larger share of market.

So, with all the good news, how have the financials stacked up and what does the future hold?

How Strong Are Seagate’s Financials?

On the back of recent developments, Seagate enjoyed significant revenue growth by selling to cloud clients. The increase was not limited to the United States but occurred worldwide.

For the March quarter, financial results were impressive across the board. Revenue reached $1.66 billion, an increase of 6% from the previous quarter.

Operating income on a non-GAAP basis increased by 44%, reaching $183 million. And non-GAAP operating margin of 11% rose by 300 basis points on a quarter-over-quarter basis.

Other metrics pleased shareholders too. For example, gross profit went up by $65 million during the March quarter, reaching $432 million while non-GAAP gross margin improved for the fourth quarter in a row, reaching 26.1%, and grew by around 250 basis points from the prior quarter.

Adjusted EBITDA rose by 29% in the March quarter, reaching a total of $278 million. The non-GAAP net income was $71 million, which is almost three times more than the previous quarter. It led to non-GAAP earnings per share of $0.33. Free cash flow also rose to $128 million.

Is Seagate Divided Worth It?

Seagate pays a 2.97% dividend equivalent to an annualized payout of $2.80 per share, making it well worth buying given that 16 analysts have revised earnings estimates higher.

The Board of Directors at Seagate has announced a quarterly cash dividend of $0.70 for each share, showing the strong results of the company’s operations. 

Of some concern however is the fact that Seagate Technology is saddled with $5.1 billion in long-term debt against just $795 million in cash reserves.

That puts the dividend in question long-term unless Seagate can grow and boost free cash flows, so can it?

What Lies Ahead for Seagate’s Growth?

Seagate expects demand for its products to rise, mainly for cloud storage and business use, as well as in markets where data is very important.

Management thinks this demand for important data solutions will persist this year, especially with smart city developments. Legacy and non-HDD markets are expected to perform similarly in the June quarter.

The merging of strong demand trends and its technology lead positions the company well for financial success. The top brass believes the firm will achieve or even exceed profit margin goals long-term, especially when products based on HAMR are used more widely.

They also expect the large storage market to grow as a result of heightened cloud-based demand. Revenue for the June quarter is forecast to come in at $1.85 billion, while non-GAAP earnings per share of $0.70 is expected, suggesting a 16% rise versus a year ago. 

Additionally, for Q4 of fiscal year 2024, which ends in June 2024, analysts predict that Seagate’s revenue will grow by 16.1% compared to the same period last year, reaching $1.86 billion, while earnings per share is expected to land at $0.71.

Similarly, for the first quarter of fiscal year 2025, ending in September 2024, Seagate’s revenue is forecast to go up by 41.5% from the previous year to $2.06 billion, while earnings per share is anticipated at $1.11. Plus, Seagate has topped the consensus EPS estimates in three of four trailing quarters, which is impressive.

Is Seagate’s Valuation Justified?

While Seagate is clearly executing well, valuation does appear lofty now. The forward non-GAAP P/E ratio for Seagate is 90.82, substantially higher than the industry’s average of 23.19x.

Moreover, the forward EV/Sales ratio stands at 3.51x, and the forward EV/EBITDA ratio has hit 27.89x, which is higher than what is typical in this sector by 26.8% and 95.3%, respectively.

With all that said, the planned actions by management reveal that more growth and profit may lie ahead, supporting a higher valuation at this time. 

It cannot be overlooked though that a discounted cash flow forecast analysis right now pegs fair value closer to $70 per share, suggesting close to 24.8% downside risk.

Is Wall Street Bullish on Seagate?

Seagate’s shares have gone up in value during the past 12 months because of positive changes in the the data storage market and beliefs that increasing needs for artificial intelligence might be a strong growth catalyst.

Demand appears to be rising, and prices might well increase, so Seagate’s profits may very well increase substantially in the coming years. How much AI will help its business is not certain yet, but new technology seems ready to boost the need for data storage solutions. All this suggests that Seagate could soon enter a strong period of growth.

In addition, the demand for storage stemming from artificial intelligence technologies seems to be a tailwind that will sustain. The business of hard drives and different data storage methods usually experiences regular ups and downs, but now it looks like these favorable conditions are supporting Seagate’s progress.

On the product side, it hasn’t all been smooth sailing. For example, there was a small problem in the HAMR qualification for the main CSP customer but it hasn’t created much of a dent in the financials. Levered free cash flow margin of 17.20% for the past 12 months is 77.8% higher versus the industry’s average margin of 9.67%.

Capital expenditures relative to sales over the last 12 months, at 3.99%, are significantly above the industry average of 2.32% by a margin of 71.8%.

Additionally, the stock has shown an asset turnover ratio for the same period at 0.83x, which surpasses the usual industry rate of 0.61x by a considerable amount.

Of the 23 analysts, 12 recommend holding the stock, and 10 advised buying it. Just one analyst is advising to sell shares. The experts in this field predict that the stock might increase by 10.8%, which would raise its value to $95.06 per share. The bottom line is it seems wise to hold onto Seagate as it is poised for further growth in the future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.