4.7 Dividend Yield, PE Ratio Below 4 and David Einhorn’s a Huge Holder: The Seagate Mystery

Do Seagate Technology’s (STX) minuscule PE ratio and gigantic dividend yield mean the company’s is screwed?

Not everybody thinks so. Hedge Fund manager David Einhorn, for instance, owns more than 23 million shares, nearly 10 percent of the outstanding. And Greenlight Capital, Einhorn’s fund, recently added significantly to his holdings.

But, overall, the market seems to be unimpressed by Seagate, even when the company reported sharply higher earnings for its fiscal first quarter compared to the same period ending in October 2011.

STX Chart

STX data by YCharts

Investors have lavished love on the technology sector in general lately, of course. But disk drive makers’ fortunes are seen as closely tied to the ailing PC industry. And part of the reason for Seagate’s profit improvement is that it has had more product to sell than most rivals, as its Thailand-based drive suppliers were less impacted than others in 2011 flooding there. The effects of that flooding have been largely remedied now, theoretically erasing Seagate’s temporary advantage.

Seagate’s most recent quarterly results also committed the serious infraction of missing estimates, as its EPS of $1.40 fell well below the consensus $1.67 analysts expected. That misstep is likely behind the shares’ lackluster performance of late.

But there is more to Einhorn’s infatuation than contrarianism. One clue is Seagate’s seductive 4.73 % dividend yield. Compared to other tech stocks -- Microsoft (MSFT), Intel (INTC), International Business Machines (IBM) and Hewlett-Packard (HPQ) -- the yield is impressive.

STX Dividend Yield Chart

STX Dividend Yield data by YCharts

Seagate can also be seen as a something of a consolidation play in the disk-drive sector. The company has conducted some noteworthy acquisitions in the last year, including a $1.4-billion deal for Samsung’s hard drive business and a smaller deal for hardware manufacturer LaCie. Rival Western Digital (WDC) has also been an active acquirer, but assuming disk drives aren’t going to go away, there is likely room for at least a handful of top players.

And disk storage isn’t likely to disappear soon. In addition to filling bays on consumer and business PCs and laptops, Seagate also supplies storage devices for servers. That ties their fortunes to the fast-growing data farm business, and the cloud.

Seagate has managed to stay among the leaders in the fast-spinning world of data storage since its founding in the days of the Apple II, before the IBM PC and before Compaq. With a rich dividend payout, a modest PE and a strong position in a key technology sector, this venerable drive maker may not be ready to crash just yet.

Mark Henricks is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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