Data Storage Businesses With High-Yield Cash Return Plans
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, SanDisk (NASDAQ: SNDK) experienced a decent rise of more than 3.4% in after hours trading to $57 per share. The positive market momentum was due to its recent announcement to initiate a $0.225 quarterly dividend per share and as much as $2.5 billion in new share buybacks. Should we invest in SanDisk after its recent announcement to accelerate cash return to investors? Let’s take a look.
A conservative capital structure with potentially high cash return yield
SanDisk is one of the world's leading flash memory storage solutions companies, providing a diverse product portfolio including flash memory cards, USB flash drives, and solid-state drives (SSD). In the second quarter of 2013, SanDisk experienced growing revenue and profits. Revenue has increased from more than $1 billion last year to nearly $1.48 billion this year, while the operating income jumped more than ten times, from $36 million to $393 million. The diluted EPS came in at $1.06 per share, much higher than the EPS of $0.05 per share in the second quarter last year.
What also makes SanDisk interesting is its conservative capital structure. As of June 2013, it had more than $7.34 billion in equity, as much as $5.23 billion in cash and investments, and only $809 million in convertible long-term debt. The goodwill and intangible assets came in at more than $410 million. Investors might expect to have more cash return with the recently announced program of quarterly dividend initiation and the authorization to repurchase an additional $2.5 billion worth of stock. The company also reported that a $1 billion repurchase would be completed through an Accelerated Share Repurchase agreement. SanDisk is trading around $55.10 per share, with the total market cap around $13.30 billion. A forward annual dividend of $0.90 per share and a share buyback of $2.5 billion would generate a total cash return yield of more than 20.4% for SanDisk’s shareholders.
It has the most expensive valuation
At the current trading price, SanDisk is valued around 7.7 times its trailing EBITDA. Compared to other big data storage players, including Western Digital (NASDAQ: WDC) and Seagate Technology (NASDAQ: STX), SanDisk is the most expensively valued of the three.
Western Digital is the cheapest. At $64.40 per share, Western Digital is worth $15.20 billion on the market. The market values the business at only 3.74 times its trailing EBITDA. Western Digital is considered the industry leader with more than 6,000 patents globally and around 44% market share in each product segment. Over the years, Western Digital has managed to shift to the non-PC segment. In the period of 2005-2013, the company’s non-PC segment percentage revenue share has increased from less than 20% to nearly 50%.
With the market-leading position, Western Digital expects to benefit strongly from fast-growing storage demands. The company estimated that around 75% of exabytes in 2020 will be stored on hard drives, with the majority of demand coming from enterprise systems. I also like Western Digital's consistent cash flow generation. In the past 12 months, Western Digital delivered more than $3.5 billion in operating cash flow and more than $2.4 billion in free cash flow. At the current price, the dividend yield is 1.60%, with the low payout ratio at only 15%.
Seagate is also valued lower than SanDisk. It is trading around $40.90 per share, with a total market cap of $14.70 billion. The market values Seagate at 5.20 times its trailing EBITDA. Seagate had been one of David Einhorn’s favorite stocks. Einhorn initiated a position in the company two years ago, when Western Digital suffered from 2011 flooding in Thailand, which benefited Seagate. Seagate has been a profitable play for Einhorn with the improved competitive environment and aggressive share repurchases. Einhorn reportedly closed his position with a 64% compounded return over a nearly two-year holding period.
Looking forward, Seagate will also benefit from growing market trends in data storage, which is driven by cloud, mobile, and open source advancement. The company also plans to repurchase up to $2.5 billion worth of shares, representing a buyback yield at 17%. Seagate also delivers to shareholders an annualized dividend yield of 3.7%, and the payout ratio stays at 29%.
All three of these companies could grow with the rising demand for data storage, especially in new technology areas including mobile and cloud. However, the global PC business is dying. Consequently, they should plan ahead to significantly shift their businesses out of the declining PC segment and into the non-PC segment. That is the key to future growth and profitability.
My Foolish take
SanDisk could deliver a high cash return to shareholders if it executed the share buyback plan quickly. However, I am not very excited with SanDisk at its current trading price because of the company's high valuation compared to its peers.
Of the three companies discussed above, Western Digital seems to be the best choice for investors right now, due to its global market-leading position, low valuation, and low payout ratio. If Western Digital increases its payout ratio equivalent to Seagate’s, the dividend yield could reach more than 3%. Last but not least, investors could benefit from the company's rapid shift out of the PC segment to move into the growing non-PC segment.
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Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!