Evercore Analyst: Is Western Digital’s Dividend Sustainable?



Evercore ISI analyst downgrades Western Digital

The world’s third-largest NAND (negative AND) chip manufacturer, Western Digital (WDC), saw its stock fall 6% in the first half of today’s trading session after Evercore ISI analyst C.J. Muse downgraded the stock, raising doubts about the sustainability of its $2 dividend. The downgrade also sent the stock of rival NAND supplier Micron Technology (MU) down 3.7%.

According to CNBC, C.J. Muse downgraded Western Digital to “underperform” from an “in-line” rating and lowered its price target to $30 from $35. He stated that Western Digital lags behind its competitors, which he estimates has almost halved its enterprise SSD (solid-state drives) market share over the last few years to ~12%.

The NAND market has been suffering from an oversupply situation since March, which reduced NAND prices significantly and affected the margins of NAND manufacturers. The oversupply even forced suppliers like Samsung (SSNLF) and Micron to cut their capital spending for 2019.

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Is Western Digital’s dividend sustainable?

Significant declines in NAND average selling prices has been reducing Western Digital’s profit margins and free cash flow over the last four quarters. Its free cash flow fell 36% sequentially to $428 million in fiscal 2019’s first quarter, which ended on September 28, 2018. Every quarter, the company spends $148 million of its free cash flow on dividend payments.

Western Digital has a long-term debt of $10.9 billion and a cash reserve of $4.6 billion. C.J. Muse stated that, even though 98% of the company’s debt isn’t due until 2023, the declining free cash flow threatens the company’s ability to pay a dividend. He also reduced his fiscal 2019 EPS estimate for Western Digital from $4.0 to $2.92.

Western Digital is slated to report its fiscal 2018 second-quarter earnings on January 24. The stock is set to decline further on disappointing earnings.

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