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Home Tech

This Tech Stock Just Cut Its Dividend: Here’s Why It May Be a Buy

Jacque Colbert by Jacque Colbert
May 2, 2020
in Tech
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This Tech Stock Just Cut Its Dividend: Here’s Why It May Be a Buy
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On Thursday, April 30, NAND flash and arduous disk storage specialist Western Digital (NASDAQ:WDC) reported its March quarter earnings, with an unwelcome shock for shareholders — a suspension of the corporate’s $0.50 quarterly dividend. Even within the face of COVID-19, the reduce was a little bit of a shock, given the corporate’s blended outcomes that included a beat on income, a miss on earnings per share, and seemingly strong steerage for sequential progress in each income and earnings subsequent quarter.

Furthermore, on the conference call with analysts, administration pointed to robust storage demand in each cloud and shopper notebooks, offset by weak spot in cell; nonetheless, Western Digital is not as large of a participant in cell. Administration was additionally bullish on new storage-heavy gaming consoles set to be launched later this 12 months.

In mild of these constructive feedback, it appears curious that the dividend was reduce, sending shares down over 12% the next day. But the reduce could have offered long-term shareholders with a singular shopping for alternative.

A NAND flash storage device.

Picture supply: Getty Photographs.

A brand new CEO on the town

One important level of context is that this was the primary earnings report below new CEO David Goeckeler, who got here to the corporate from Cisco (NASDAQ:CSCO) and was simply appointed on March 5.  As a model new CEO who can now form his personal legacy on the firm, and with the COVID-19 pandemic as an added issue, Goeckler had maybe a singular alternative to droop the dividend with out taking an excessive amount of criticism for the transfer. Due to this fact, I do not assume Western Digital had to droop the dividend; it was extra a capital allocation alternative by a brand new CEO taking a recent take a look at the corporate.

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Western Digital’s dividend had already been considerably out-of-place for the previous couple of years, ever because the firm’s acquisition of SanDisk in 2016. Whereas that acquisition may need been the precise strategic transfer to get Western Digital into the NAND flash market, it got here at a excessive value, and loaded the corporate’s steadiness sheet with debt. Final quarter, debt totaled $9.6 billion versus $2.9 billion in money.

That is in all probability an excessive amount of debt for a enterprise as cyclical as Western Digital, which noticed its working revenue fall from $3.6 billion in fiscal 2018 all the best way to close zero amid the U.S.-China commerce struggle final 12 months.

The reminiscence enterprise can also be capital-intensive, as gamers race to take advantage of densely stacked NAND modules and highest-capacity disk drives, which develop output whereas decreasing prices per bit. Nonetheless, that innovation takes upfront capital expenditures, and Goeckeler probably wished the liberty to spend money on new progress capabilities with out having to bear the practically $600 million annual dividend payout.

Administration laid out a brand new goal of bringing down debt to at the least $6 billion earlier than reinstating any form of capital returns. That means one other $3.6 billion of debt pay-down to go, which might be important for Western Digital and will take a number of years, even with a robust reminiscence and storage up-cycle.

Clearly, Goeckler would not have the bags of getting made the SanDisk acquisition, and apparently did not like Western Digital having a lot debt. Due to this fact, he was capable of make the transfer with the altering of the guard.

A really low-cost inventory

After the sell-off, Western Digital’s inventory is down 35% on the 12 months and 65% from all-time highs set again in 2015. Its 1.Three price-to-book ratio additionally appears moderately low-cost, particularly if the storage upcycle holds past subsequent quarter, and if the corporate de-risks by efficiently paying down debt. 

And regardless of the dividend reduce and pandemic considerations, demand for storage in cloud knowledge facilities, notebooks and different digital units, together with new gaming consoles set for later this 12 months, must be a tailwind for the storage business for the following few years. Whereas I do not assume Western Digital is as well-positioned as a few of its reminiscence and storage opponents, it is nonetheless considered one of solely a handful of corporations that make a vital product with a long-term progress trajectory. That makes Western Digital’s beaten-down inventory appear to be an amazing value after the post-dividend-cut sell-off.

— to www.fool.com

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Jacque Colbert

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