Are Seagate Technology PLC's $1.9 Billion of Stock Buybacks Increasing Shareholder Value?
Seagate Technology is a maker of hard-disk drives, or HDDs, and other forms of storage, a market that has seen its fair share of ups and downs in recent years due to a weak PC market. Yet, shares of the stock have appreciated immensely since 2012 due to an aggressive capital return program. This of course begs the question, are big buybacks still in the best interest of shareholders?
The capital return plan
Seagate Technology announced its fiscal 2014 full-year earnings back in July. During that year, the company returned $2.5 billion to shareholders in the form of dividends and stock buybacks, approximately 97% of its operating cash flow, nearly $2 billion of which was spent on buybacks. As a result, investors can conclude that Seagate's primary method of increasing shareholder value is through buybacks, which, in the past, has worked in the investor's favor.
As seen below, Seagate's stock has risen an astounding 226.6% since January 2012. Meanwhile, its market capitalization has increased less than 130% in the same period. The reason for this disconnect is buybacks.
When a company buys back stock, it reduces the number of shares outstanding. In the case of Seagate, it has reduced its total number of shares outstanding by more than 27% since January 2012.
The end result of this 27% reduction in shares outstanding has been a near 100% surplus in stock gains since January 2012. Theoretically, company improvements and a bullish market helped spark the 130% increase in Seagate's market capitalization. However, the remaining 97% of stock gains were created from the company's willingness to reduce its total number of shares.
What are these company improvements?
The reason that Seagate has been able to buy back shares at such a rapid rate in recent years is because it operates in the high margin HDD space. HDDs are storage devices used in PCs, laptops, DVRs, home entertainment systems, etc. These are all markets that have lagged in recent years due to the rise of smartphones and tablets, which use solid state drives, or SSDs.
Back before smartphones and tablets became prevalent worldwide, the majority of Seagate's annual revenue came from HDD sales in PCs and laptops. However, with consistent year-over-year declines for the better part of five years in PCs, Seagate has diversified to the point where now only half of its revenue comes from PC-related applications.
The rest of Seagate's revenue comes from HDD sales in the cloud, and from new investments it has made in hybrid drives and SSDs. As for the cloud, consumers and businesses have grown rather fond of storing data that is accessible on multiple devices from anywhere in the world, via the cloud; but all of that data is backed up with HDDs by the companies that offer cloud services. The growth of cloud-related HDD sales has helped Seagate keep revenue near flat during a period of broad PC sales declines.
Seagate is also investing in alternative storage products for the future. The company announced back in May that it was acquiring the SSD-related business from LSI for $450 million in cash. That acquired business is expected to create just $150 million in revenue next year. If Seagate meets analyst expectations for sales of $14.3 billion next year with year-over-year growth of 4.3%, it's safe to assume that the majority of sales will come from HDDs.
Are buybacks wise for the future
With a near 40% market share of the HDD space and a tiny share of the SSD market, Seagate is likely implementing the strategy that will be best for shareholders long term. Seagate operates in an industry that has allowed it to produce an operating margin north of 13%.
Not to mention, Seagate Technology's stock trades at less than 12 times trailing 12-month earnings, and less than 9 times next year's expected earnings. Meanwhile, the S&P 500 trades at a much higher multiple of nearly 18 times earnings according to multpl.com. Therefore, with Seagate trading at such an attractive valuation, and with earnings expected to increase in the next year, it is certainly wise for the company to buyback its cheap stock.
Looking ahead, Seagate is, in fact, a storage company, and already has a presence in most industries where data storage is found. The company is vulnerable to the volatility of sales in key industries like PCs, which still account for about half of its annual revenue. Thankfully, PCs are showing signs of a recovery. According to IDC, shipments in worldwide PCs have fallen less than 2% for each of the last two quarters. This performance is far better than the mid-single-digit declines seen in the PC industry in the quarters prior.
If the PC market can improve, Seagate's market capitalization will naturally rise due to these improvements. So long as the company continues to buy back stock at a similar rate, stock gains will continue to outperform the performance of Seagate's market capitalization.
Seagate Technology is a company that prides itself on returning high amounts of capital to shareholders. With the company's $17 billion market capitalization, billions in buybacks last year, $2.5 billion in cash, and its recent court victory against competitor Western Digital that will earn it a payment of $630 million, investors should feel confident that Seagate's buyback program will continue to drive shareholder value long term.
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The article Are Seagate Technology PLC's $1.9 Billion of Stock Buybacks Increasing Shareholder Value? originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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