Look To The West: Western Digital Corp. (WDC) and Seagate Technology PLC (STX)

If you go beyond the headline earnings, Western Digital looks even more impressive. The company retired 4.2 million shares in the current quarter, and the company’s net cash position increased 57.70% year-over-year. More important for investors is, their free cash flow increased over 103%, and their dividend payout ratio is just 23%.

Conclusion:
On the surface, Western Digital’s 2.14% yield and 1.5% estimated growth in earnings aren’t going to catch most investors attention. However, with a 23% payout ratio and huge free cash flow growth, the company can afford to reward investors with a better yield and further share repurchases. Seagate offers a better yield at 4.5%, and both companies will likely surprise analysts with their growth over the next few years. The old guard of Microsoft and Intel both offer compelling values with 3.3% and 4.2% yields respectively. Each company is expected to grow earnings by around 8% to 12% over the next few years, and both have payout ratios of 50% or less.

While Microsoft and Intel look like good values for risk averse investors, those who are willing to ride a turnaround should consider Seagate and Western Digital. Both companies have low payout ratios, huge free cash flow, and are repurchasing shares. If customers continue to choose traditional hard drives because of their cost effective storage, the dual forces of the rise of Ultrabooks, and digitization, should be a boon for both companies.

The article Look To The West originally appeared on Fool.com and is written by Chad Henage.

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