Apr 25, 2014: Bought 72 shares of SDRL at $34.91 per share.
Established in 2005 as a Bermuda-based company, Seadrill Limited (SDRL) is an offshore deepwater drilling contractor providing worldwide services to the oil and gas industry. The company operates an extensive fleet comprising of drill ships, jack-up rigs, semi-submersible rigs and tender rigs for operations in shallow to ultra-deepwater areas and harsh and benign environments.
SDRL is a Dividend Challenger with a 5-year streak of dividend increases. It pays quarterly dividends in March, June, September, and December. Starting Yield on Cost (YoC) is an impressive 11.23%.
SDRL has returned 346% since 2005, outpacing the S&P 500 by nearly five-to-one:
The following chart shows SDRL's dividend payments and earnings per share since 2006. Both are trending up, but rather erratically:
Analysis of SDRL
My fair value estimate for SDRL range from $31.25 to $54.20, which means I paid at worst a 10% premium. The following table provides some key statistics for SDRL:
SDRL easily meets the requirements of the Chowder Dividend Rule, as the sum of SDLR's dividend yield and its 5-year dividend growth rate is 31% (significantly above 12%).
However, SDRL falls short of these selection criteria:
- EPS% payout < 40% (71.5%) or FCF% payout < 50% (n/a)
- Debt to equity ratio < 50% (199%)
Other ratings for SDRL
SDRL is my 7th holding in the Energy sector and my 29th holding overall. It is certainly one of my riskier buys, given the relatively short dividend history and erratic earnings history. However, I like SDRL for several reasons, including, of course, its impressive YoC and dividend growth rate.
Many investors are worried that the slowing offshore drilling market will negatively impact SDRL, considering its high debt level, its capital expenditure in building new rigs, and its rather large dividend payments. However, despite the down market, SDRL has managed to secure contracts for 94% of its fleet for 2014 and at increased price levels. The trend in the offshore market is that high-specification rigs (like SDRL's) are taking contracts away from older deepwater and midwater-rated rigs.
SDRL's price has taken a beating over the past six months. It is now trading at a PE-ratio of only 6.46 times trailing twelve month earnings, considerably lower that its peers. Perhaps SDRL's price will continue to fall, but for a long-term investor, there is great value in SDRL. In conjunction with its excellent dividend yield, I'm willing to take the risk here...
72 shares of SDRL represent $282.24 of expected annual dividend income, which increases DivGro's projected annual dividend income to $3,950.03.
SDRL is the 29th dividend stock purchase for DivGro.