Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Seagate Technology plc (NASDAQ:STX) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 22nd of September, you won’t be eligible to receive this dividend, when it is paid on the 7th of October.
Seagate Technology’s upcoming dividend is US$0.65 a share, following on from the last 12 months, when the company distributed a total of US$2.60 per share to shareholders. Calculating the last year’s worth of payments shows that Seagate Technology has a trailing yield of 5.3% on the current share price of $48.67. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Seagate Technology can afford its dividend, and if the dividend could grow.
See our latest analysis for Seagate Technology
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Seagate Technology is paying out an acceptable 67% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (60%) of its free cash flow in the past year, which is within an average range for most companies.
It’s positive to see that Seagate Technology’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Seagate Technology’s earnings per share have fallen at approximately 6.5% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Seagate Technology has delivered 15% dividend growth per year on average over the past nine years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it’s always worth checking for when the company can’t increase the payout ratio any more – because then the music stops.
To Sum It Up
From a dividend perspective, should investors buy or avoid Seagate Technology? While earnings per share are shrinking, it’s encouraging to see that at least Seagate Technology’s dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It’s not that we think Seagate Technology is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.
Having said that, if you’re looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Seagate Technology. To help with this, we’ve discovered 3 warning signs for Seagate Technology that you should be aware of before investing in their shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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