Shares in Seagate Technology PLC (NASDAQ:STX) blasted higher by 20% in Tuesday trading after the tech company raised its revenue forecast and announced more job cuts — and both moves help protect what has become the second highest dividend yield in the S&P 500.
STX stock was off 34% for the year-to-date before Tuesday’s rally, and that had the dividend yield standing at an eye-watering 10.46%. A tech stock — one that makes hard disk drives, no less — isn’t supposed to be throwing off that sort of income. If it is, there’s clearly something wrong.
In STX stock’s case, shares are getting crushed because global PC shipments have been in decline for five consecutive years. At the same time, faster, more energy efficient solid-state drives keep getting bigger, faster and cheaper.
STX might not be facing an existential crisis — HHD tech won’t go away completely overnight — but there’s little question that this is a secular decline. There’s a reason why STX stock has been in a steep selloff for a year-and-a-half.
Against that backdrop, the only thing that makes Seagate appearing for many investors is the gusher of a dividend yield. Sure, everyone knows a yield that high is just begging for a dividend cut, but investors starved for income feel forced to run the risk.
Anything that Seagate can do to keep the cash coming is going come as a great relief to anyone betting on the payout, and so that brings up to Tuesday.
STX Stock Pops on Yield Hunger
STX delivered a double-whammy of good news. First, it said that quarterly revenue and gross margin were going to be higher than the company or Wall Street analysts previously thought.
Two, it took another scythe to its ranks of employees. As ugly as it is, equity investors love job cuts and pretty much anything else that reduces costs.
For the quarter to be reported Aug. 2, Seagate said revenue will come in $2.65 billion. That’s better than its prior estimate of $2.3 billion, as well as analysts’ expectations for $2.33 billion, according to a survey by Thomson Reuters.
Moreover, STX said adjusted gross margin is set to be more than 25% vs. a previous outlook of 23%. The better-than-expected results came from a slowdown in the rate of decline of PC shipments. Global PC shipments fell only 4.5% in the second quarter, according to research firm International Data Corp., while it was looking for a drop of 7.4%.
But it was the second round of heavy job cuts in as many weeks that really improves the security of the dividend level. Seagate said it will cut another 6,500 positions — roughly 14% of its labor force — less than two weeks after announcing 1,600 job cuts.
Of course none of this means that the dividend level is forever out of peril. It’s simply a confidence booster. Although STX has far more than enough levered free cash flow to cover the dividend, the payout ratio is more than 200%. Near-zero interest rates help make up for that, but it’s worth worrying about the long-term sustainability of the payout.
The long-term fundamentals looks pretty poor for STX stock, but it’s hard to turn your nose up on the dividend when it looks safe for now. If you’re willing to accept risk for income, Seagate stock could be a good fit.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
