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Wednesday, April 30, 2014

Recent Buy: SDRL

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%)
Based on these statistics, SDRL ears 4 stars out of a possible 7: (*******)

Other ratings for SDRL

 Zacks Rating 5 Strong Sell
 MorningStar Rating (*****)
 The Motley Fool's CAPS Rating (*****)

Concluding Remarks

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.


  1. Hi Ferdi,

    I'm a frequent reader of your blog. What are you going to do now after the announcement of SDRL suspending its dividend? Will you take your loss?


    1. Hi FIP -- thanks for your comment and for reading my blog.

      I'm going to address your question in my next post, so look out for that. What ever I decide, it wouldn't be a knee-jerk, quick reaction. Part of this process is learning and I believe one learns best when faced with a challenging situation.

      Take care!


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