Seagate Technology’s cash flow boosts the safety of its dividend yield


Summary of August selections

Based on price return, the Safest Dividend Yields Model Portfolio (-10.0%) underperformed the S&P 500 (-8.0%) by 2.0% from August 19, 2022 to September 19, 2022. On On a total return basis, the model portfolio (-9.5%) underperformed the S&P 500 (-7.6%) by 1.9% over the same period. The best performing large cap stocks and the best performing small cap stocks each rose 1%. Overall, nine of the 20 safest dividend-yielding stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from August 19, 2022 through September 19, 2022.

The methodology of this model portfolio mimics an “All Cap Blend” style with an emphasis on dividend growth. The stocks selected are rated attractive or very attractive, generate positive free cash flow (FCF) and economic benefits, offer a current dividend yield > 1% and have a track record of more than 5 years of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially dividend growth.

Featured Stock for September: Seagate Technology


Seagate Technology Holdings PLC (STX) is the featured stock in September’s Safest Dividend Yields model portfolio.

Seagate Technology has grown revenue 2% per year and net operating income after tax (NOPAT) 10% per year over the past five years. The company’s NOPAT margin declined from 11% in fiscal year 2017 (year end was 6/30/17) to 16% in fiscal year 2022, while capital turnover invested fell from 1.6 to 1.7 over the same period. Rising NOPAT margins and capital turnover increase Seagate Technology’s return on invested capital (ROIC) from 17% in fiscal 2017 to 27% in fiscal 2022.

Figure 1: Seagate Technology and NOPAT revenue since FY2017

Free cash flow easily supports regular dividend payments

Seagate Technology increased its regular dividend from $2.52/share in fiscal 2017 to $2.77/share in fiscal 2022. The current quarterly dividend, when annualized, provides a yield in dividends of 5.1%.

Seagate Technology’s free cash flow (FCF) easily exceeds its regular dividend payouts. From fiscal year 2018 to 2022, Seagate Technology generated $7.3 billion (44% of current company value) in FCF while paying $3.4 billion in dividends. See Figure 2.

Figure 2: Seagate technology FCF vs regular dividends since FY2018

Companies with a high FCF offer higher quality dividend yields because the company has the cash to support its dividend. The dividends of companies with a low or negative FCF cannot be trusted as much because the company may not be able to continue paying dividends.

STX is undervalued

At its current price of $54/share, Seagate Technology has a price-to-economic book value (PEBV) ratio of 0.4. This ratio means that the market expects Seagate Technology’s NOPAT to decline permanently by 60%. This expectation seems overly pessimistic given that Seagate Technology has increased NOPAT by 10% compounded annually over the past five years and 7% compounded annually over the past 15 years.

Even if Seagate Technology’s NOPAT margin falls to 13% (10-year average vs. 16% on the TTM) and the company’s NOPAT falls by 4% compounded annually over the next decade, the stock would be worth more than $90/share today – a 67% upside. Discover the calculations behind this reverse DCF scenario. If the company’s NOPAT were to grow further in line with historical growth rates, the stock would have even more potential.

Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology

Below are details of the adjustments I make based on Robo-Analyst results in Seagate Technology’s 10-K and 10-Q:

Income statement: I made adjustments of $298 million, with the net effect of removing $269 million of non-operating expenses (2% of revenue).

Balance sheet: I made adjustments of $4.7 billion to calculate invested capital with a net increase of $1.6 billion. The most notable adjustment was $2.6 billion (48% of reported net assets) in asset write-downs.

Valuation: I made adjustments of $5.4 billion, which had the net effect of reducing shareholder value by $5.2 billion. Besides total debt, one of the more notable shareholder value adjustments was $120 million in excess cash. This adjustment represents 1% of Seagate Technology’s market value.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation for writing about a specific stock, style, or theme.


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