The Surging Net Payout Yield of Seagate Technology

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When Seagate Technology (NASDAQ: STX) reported earnings on Monday night, it confirmed that the company had continued a massive buyback spree that began in January of 2012. Along with a current 4.5% dividend yield, the stock provides a massive net payout yield (NPY) of almost 30%.

The company is a worldwide leader in hard disk drives and storage solutions.

Seagate dropped over 9% as investors were disappointed with results and guidance. Though the stock recently surged to all-time highs, it was trading considerably below the ability to generate cash if the company bought back 6.6% of the outstanding stock in one quarter alone.

Q2 2013 Highlights

 The company reported the following highlights for Q2:

-       Reported revenue of $3.7B grew 15% versus $3.2B last year.

-       Reported gross margins of 27.6%.

-       Reported diluted earnings per share of $1.38 versus $1.32 last year.

-       Generated cash from operations of $844M.

As mentioned above, the most impressive part of the earnings report was the ability to generate a massive $844m in cash for the quarter.  Even with the company returning $1.1B to shareholders during the quarter, the cash and short-term investments still totaled approximately $2B.

Net Payout Yields

The NPY is the combination of the dividend and buyback yields. In essence the combined yields provide for a more compelling investment than the dividend yield alone.

Seagate though is abnormal in that the high yield usually occurs from a falling stock that juices up a dividend and encourages a higher level of stock buybacks. In this case, the company actually bought stock at higher and higher prices throughout the year. As can be seen in the below chart, the NPY increased with the stock price. In fact, the company bought most of the stock over $20 last year after it had spent all of the previous year below $20.

 

<img src="/media/images/user_15227/npystx_large.png" />

As shown above, the company bought over 30M shares for over $840 or approximately 6.6% of the outstanding shares during the last quarter of the calendar year. In total, the company spent around $3.2B on share buybacks during calendar year 2012.

The average diluted share count dropped to 379M from 439M last year while the outstanding balance dropped to 358M shares as of December 28th. That reduction will help juice earnings in the next year.

Other tech NPYs

While Seagate is alone in the ability and willingness of large cap tech stocks to repurchase a significant amount of stock, it isn’t the only stock with a decent yield. Both Motorola Solutions (NYSE: MSI) and Applied Materials (NASDAQ: AMAT) have attempted to juice returns via share buybacks.

While Applied Materials approaches Seagate with a 2.8% dividend yield, it isn’t able to match the buyback as it spent $1.32B or 8.5% during the last 12 months. On the other hand, Motorola Solutions only musters a 1.8% dividend with a $2.4B buyback that amounted to 13.9% of the outstanding shares.

The NPYs while impressive at 11.3% and 15.7%, respectively, don’t match the massive 29% yield of Seagate.

Valuation

While investing based on the NPY theory suggests not even reviewing the fundamentals, those also appear compelling. The stock trades at only 6.1x forward earnings after a 50% gain in the last few months. It also trades at less than 1x sales. Both valuations are very cheap, especially for a company with that ability to generate this level of cash.

Conclusion

While Seagate fits the NPY pattern of operating in an underappreciated sector, hard disk drive storage, the company is at odds with the normal NPY stock. It currently trades near 52-week highs and nearly double the 52-week low.

Oddly, Seagate is that one company that supports the wisdom suggesting buying high and selling higher. That method worked for all of 2012 and might be setting up for another successful 2013. The selloff on Tuesday might provide that entry point for anybody missing the 2013 rally.


Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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