Dividend Watch: Disk Drive Dividends Return; Is Storage Next? (STX, WDC, EMC, NTAP)

It was Western Digital Corporation (NYSE: WDC) that started the good news flow again in the disk drive sector after it made a transformative acquisition. Now it is Seagate Technology PLC (NASDAQ: STX) which is ruling the roost for good news in the storage sector.  The company raised its guidance, but what income investors will care most about is that Seagate is reinstating its dividend.  This will have implications for Western Digital Corporation (NYSE: WDC) and may ultimately even have some ramifications for EMC Corp. (NYSE: EMC) and maybe for NetApp, Inc. (NASDAQ: NTAP).

Seagate’s last paid dividend was back in February 2009 when the economy was on the verge of a collapse.  That payment was only $0.03 after having been as high as $0.12 per quarter before.  Now the reinstated dividend will come to $0.18 per quarter, payable on June 1, 2011 to shareholders of record as of May 2, 2011.  It was at the end of last year that it was a buyback that drove shares.  Now we have the buyback and the dividend. 

Unlike banks, this dividend is not being reset at a lower level.  In effect, this is 50% higher of a payout than what it had been paying back in 2008 before the meltdown went into full speed.  This new payout generates a yield of more than 4.4% after a 10% gain in the shares to $16.25 this morning but this was indicated at roughly 5% last night before the gains were seen.  Seagate forecast revenues of about $2.7 billion for its fiscal third quarter, above what was about $2.6 billion in estimates.

How this ties into Western Digital Corporation (NYSE: WDC) is that this company is paying some $3.5 billion in cash and another amount of roughly $750 million in stock (25 million shares) to acquire Hitachi Global Storage Technologies.  This got things rolling in the sector last month and it effectively gets the drive market closer and closer to a duopoly between Seagate and Western with competition coming from fewer key players.

Western Digital is also a beneficiary of the news as its shares are up another 6% at $40.09.  Interestingly enough, Western Digital does not pay a dividend.  When the dust settles from the Hitachi deal, now that company will have to decide if it wants to pay a dividend to holders so that it is a comparable stock to its key rival. 

We noted a ramification for EMC Corp. (NYSE: EMC) and for NetApp, Inc. (NASDAQ: NTAP) earlier.  The ramifications are simple: EMC has been a zero-dividend payer as well and has taken criticism for not unlocking some of its cash for shareholders. NetApp has historically been a growth stock, but that growth may be slowing somewhat ahead as the scale of size comes into play.  So far EMC has chosen to make acquisitions rather than to pay holders income, and now it is a quasi-competitor since it acquired Iomega to start its storage offers down at the consumer level.  EMC shares are actually lower by 0.1% at $26.20 this morning.  NetApp shares are up only 3-cents at $46.70 today.

The biggest issue that has been pressuring the sector is the ever shrinking cost of storage. Both Seagate and Western Digital offer a small storage device that holds 1 Terabyte of data for under $100.00 to consumers.  The cost of this during the internet growth boom of the late 1990’s was exponentially higher and was generally far too expensive for most consumers.   

JON C. OGG