NETAPP INC (NASDAQ:NTAP): A Strong Dividend Stock with Solid Fundamentals and Growth Potential

Dividend investing focuses on identifying companies that not only provide steady income through payouts but also show the financial ability to maintain and possibly increase dividends over time. The "Best Dividend Stocks" screen selects securities with a high ChartMill Dividend Rating (≥7), ensuring strong dividend traits, while also requiring a minimum Profitability Rating (≥5) and Health Rating (≥5) to confirm the company’s earnings stability and balance sheet strength. This method balances yield with long-term viability, avoiding high-yield situations where payouts could be at risk due to financial instability.

NETAPP INC (NASDAQ:NTAP) appears as a strong option from this screen, showing a mix of dependable income and solid fundamentals. Here’s why NTAP is notable for dividend investors:

Dividend Strength

• Yield and Consistency: NTAP provides a dividend yield of 1.99%, slightly above its industry average (1.92%) and close to the S&P 500’s 2.32%. While not the highest yield, its reliability is supported by a 10+ year history of uninterrupted payouts, with no cuts during that time. This matches the screen’s focus on dividend stability.
• Sustainable Payout Ratio: Only 35.75% of earnings go to dividends, well below the warning level of 80%. This low ratio shows plenty of room to keep or increase dividends even if earnings vary. The company’s earnings growth (12.19% annualized over 5 years) further backs dividend sustainability, as payouts are rising more slowly (1.72% annualized) than profits.
• Growth Potential: Though NTAP’s dividend growth rate is modest, its positive free cash flow and strong profitability (discussed below) indicate potential for future raises. The fundamental analysis report notes that NTAP’s earnings growth exceeds its dividend growth, a key factor for long-term dividend investors looking for growing income.

Profitability and Financial Health

• High Profitability Rating (9/10): NTAP performs well in margins, with a gross margin of 70.19% (leading its industry) and an operating margin of 21.68%, better than 90% of peers. Its return on equity (114.04%) and invested capital (18.95%) are similarly strong, showing effective use of capital to produce earnings—a key factor for maintaining dividends.
• Solid but Mixed Health Rating (5/10): NTAP’s debt-to-equity ratio (2.39) is high, but this is balanced by strong free cash flow (debt/FCF of 2.42, better than 81% of peers) and a reasonable Altman-Z score (2.48). The company’s share buybacks (reducing shares outstanding over 1 and 5 years) reflect confidence in its financial standing.

Valuation and Growth

NTAP trades at a P/E of 14.59, below both the S&P 500 (27.91) and its industry (18.52), suggesting it may be undervalued compared to its profitability. Forward earnings growth is expected at 8.53% annually, supporting ongoing dividend stability. While revenue growth is modest (4.39% projected), NTAP’s focus on hybrid and public cloud infrastructure positions it to gain from long-term digital transformation trends.

Why These Metrics Matter

The screen’s criteria—high dividend ratings, profitability, and health—aim to exclude companies where high yields might hide underlying risks. NTAP’s low payout ratio, steady earnings, and strong cash flow illustrate the balance between yield and safety that dividend investors should seek. Its valuation and buybacks add further appeal for total return potential.

For investors looking for similar dividend opportunities, review the full results of the Best Dividend Stocks screen, which highlights other high-quality dividend payers meeting these strict filters.

Disclaimer: This analysis is not investment advice. Always conduct your own research or consult a financial advisor before making investment decisions.