WDC's Free Cash Flow Strength to Buoy Dividends and $2B Buyback Plan

Western Digital Corporation WDC is witnessing strong cash flow momentum as the top line expands, driven by cloud computing and generative AI, both of which require massive and cost-effective storage solutions that HDDs continue to offer. In the fourth quarter of fiscal 2025, total revenues of $2.61 billion surged 30% year over year, while cloud end market (90% of total revenues) rose 36%, driven by strong demand for high-capacity nearline HDDs. For fiscal 2025, revenues jumped 51% year over year to $9.52 billion.

Non-GAAP operating income was $732 million, a massive improvement from $296 million reported in the prior year quarter. This, combined with disciplined capex of $71 million, led to $675 million of cash flow in the fiscal fourth quarter. Annual operating income was $2.3 billion and free cash flow was $1.4 billion.

Another highlight was management’s focus on paying down debt. WDC reduced debt by $2.6 billion in the fiscal fourth quarter, lowering gross debt to $4.7 billion and achieving a net leverage ratio within its 1x to 1.5x target range. Moreover, cash and cash equivalents were $2.1 billion as of June 27, 2025.  

With strong cash flow, an improving balance sheet and confidence in the business outlook, its board approved up to $2 billion in share buybacks. In the fiscal fourth quarter, the company repurchased 2.8 million shares worth $149 million and distributed $36 million in dividends after initiating a quarterly payout of 10 cents per share earlier in the year.

Though management noted that “not each and every quarter will be as strong as last quarter,” it still has a sound free cash flow business model. Cash generation is likely to gain from a favorable mix shift toward high-capacity drives and disciplined capital spending going forward. This might result in enhanced capital returns in the coming years.

Where Do Competitors Stand on Shareholder Returns 

Seagate Technology Holdings plc STX announced plans to resume share buybacks in the September quarter, underscoring its confidence in the financial strength and outlook post a strong fiscal 2025 performance. Free cash flow in the fiscal fourth quarter of 2025 was $425 million, driven by robust top-line growth and disciplined capital expenditures of 3% of revenues, below the long-term target range of 4-6%. Annual free cash flow was $818 million.

STX expects cash generation to expand in the back half of calendar 2025, even with a large variable compensation payout in the current quarter. Further, structural changes and a robust product pipeline are expected to drive higher profitability and cash generation in fiscal 2026. With profitability trending higher and mass capacity storage demand accelerating, the company appears well-positioned to balance growth with meaningful capital returns, thereby enhancing shareholder value in fiscal 2026 and beyond. In fiscal 2025, the company distributed nearly 75% of free cash flow through dividends, while paying down gross debt of about $150 million in the fiscal fourth quarter.

NetApp Inc. NTAP recently announced its first-quarter fiscal 2026 results, wherein revenues of $1.56 billion increased 1% year over year. The top-line growth was cushioned by solid performance in the Americas enterprise, which offset softness in the U.S. public sector and EMEA. Non-GAAP operating margin was 25.7%, down from the prior-year figure of 25.9%. Free cash flow was $620 million in the quarter, fueling strong shareholder returns.

NTAP returned $300 million to its shareholders through share repurchases and distributed $104 million in dividends. Strong balance sheet and cash flow generation are expected to buoy shareholder returns. It had $3.3 billion in cash and short-term investments and $2.5 billion in total debt, leading to a net cash position of $840 million at the end of the fiscal first quarter.

WDC Price Performance, Valuation and Estimates

In the past month, shares have gained 14.9% against the Zacks Computer-Storage Devices industry’s decline of 4.2%.

In terms of forward price/earnings, WDC’s shares are trading at 12.43X, lower than the industry’s 18.15X.

The Zacks Consensus Estimate for WDC’s earnings for fiscal 2026 has been revised up 13.4% to $6.50 per share over the past 60 days.

Currently, Western Digital sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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