Huge Dividend Growth In An Unexpected Place: Seagate Technology PLC (STX), Intel Corporation (INTC)

A Market Leader With A High Yield
Seagate reported earnings recently that beat expectations. Revenue increased nearly 15%, but EPS increased just slightly. However, EPS was affected primarily by higher expenses from the Samsung hard drive business acquisition and the LaCie acquisition. Seagate estimated that it took 43% market share in the last three months.

While Western Digital did show better revenue and EPS growth, the comparison is a bit unfair because of the previously mentioned acquisition expenses for Seagate. In addition, Seagate beat Western Digital in two areas of particular importance to investors. First, Seagate grew free cash flow by 199% versus 103.88% growth at Western Digital. Second, Seagate’s current yield of 4.5% is significantly higher than Western Digital at 2.14%.

Are There Other Options? Yes…But…
To be fair, there are a few ways to play the “non-death” of the hard drive industry. First, Microsoft should be a beneficiary as Windows 8 ramps up and more customers become accustomed to its touch screen capabilities. Seagate’s lineup of solid-state and traditional hard drive options are cheap components that could make touch capable laptops just as appealing as some tablets. Microsoft’s yield of 3.29%, and forward P/E ratio of 9.8 is attractive. The company’s push into mobile devices with the Surface tablet and Windows Phone could lead to better mobile sales as well.

A second option would be to look at Intel. Like Seagate and Western Digital, some investors think Intel is being left behind with the mobile revolution, but don’t count Intel out yet. The company’s 4.21% yield helps while patient investors wait for Intel’s mobile investments to pay off. In addition, the stock trades for about 11 times earnings and analysts are calling for over 12% EPS growth in the next few years. As the overall computing and smartphone market grows, you can bet that Intel will find a way inside.

However, Seagate looks like an excellent choice at current prices. The shares trade for just 6.4 times projected earnings, and though analysts are calling for stagnant growth, the combination of a growing market and pricing power argues otherwise. With a high yield that is covered by a free cash flow payout ratio of just 24%, Seagate has the best combination of yield and payout ratio among the companies we’ve looked at. With a low payout ratio and a nice yield, it’s not hard to see how Seagate could help investors drive nice returns for their portfolio.

The article Huge Dividend Growth In An Unexpected Place originally appeared on Fool.com and is written by Chad Henage.

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