Most Unlikely Stock on a Major Publication’s Top-Ten-2013 List

It’s been awhile since investors had anything good to say about computer hard drive makers, because who wants to buy more desktop paperweights now that you can send everything to a cloud? So it must have been a nice surprise for data storage company Western Digital (WDC) to find itself in Barron’s magazine this week under the cover heading, “Our 10 Favorite Stocks for 2013.”

Barron’s support for Western Digital comes in part from its belief that the market isn’t as dead as investors think. It notes that the disk drive market still has about 500 million units annually, and Western shares much of it with one major rival, Seagate Technology (STX), which was the No.1 performer on Barron’s 2012 list of favorite stocks. But the backbone of the magazine’s bullishness on Western Digitcal comes from more mundane sources.

Western Digital has a strong balance sheet, filled with lots of cash. Like many healthy companies in struggling industries, it recently promised to hand over some of its wealth to shareholders. The $9.35 billion market cap company pledged to use half of its considerable free cash flow in 2013 for stock buybacks and dividends.

WDC Free Cash Flow TTM Chart

WDC Free Cash Flow TTM data by YCharts

On Dec. 4, it announced plans to accelerate a 25-cent dividend payment normally funded in January to Dec. 25. Its dividend yield now stands at about 2.6%.

The kicker to this income distribution is a PE ratio now that’s not just at under 10, but below 6. It’s been diving at an accelerated pace in the last few months, largely with the increasingly dire forecasts for PC makers. While Western Digital does sell more than just disk drives, almost all of its products are PC related, linking it to depressed tech giants Intel (INTC) and Microsoft (MSFT) in many minds.

WDC Chart

WDC data by YCharts

Few industry analysts are bullish on Western Digital; even fewer now than a few months ago. PCs, some fear, are going away more quickly than previously thought. But for those unconvinced of Western Digital as a long-term investment, Barron’s also offers this possibility: perhaps a leveraged buyout.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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