Helmerich & Payne (HP) is a contract drilling company headquartered in Tulsa, Oklahoma. The company is engaged in the drilling of oil and gas wells for exploration and production companies. It has a fleet of 328 land rigs in the U.S., 32 international land rigs and nine offshore platform rigs. Another 24 rigs is scheduled to be completed, including HP-designed and operated FlexRigs under long-term contracts with customers.
HP is a Dividend Champion with an impressive 42-yr streak of dividend increases. It pays quarterly dividends in March, June, September and December. Initial yield on cost is 3.21%.
Over the past 10 years, HP's stock has outperformed the S&P 500 by a wide margin, nearly 6-to-1. The following graph illustrates HP's impressive performance, as well as the fact that HP's share price is a little more volatile than the S&P 500. HP has a 5-year Beta averaging about 1.38.
Analysis of HP
My fair value estimate of HP is $100.60, so I bought shares at a discount of nearly 18%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.
HP passes the following of my selection criteria:
- A streak of at least 5 years of dividend increases (42 years)
- Dividend yield exceeds 2.75% (3.21%)
- Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (50.07%)
- Debt to equity ratio is below 50% (4%)
- Price to earnings ratio (P/E) is less than 20 (TTM 13.59x and Forward 11.71x)
- P/E to annual EPS growth (PEG) ratio is less than 2 (0.85)
- 5-year CAGR is at least 10% (46.91%)
- Reasonable confidence in continued dividend growth (Yes)
- Price discount is at least 5% of fair value estimate (17.56%)
- Earnings per share (EPS) percentage payout is less than 40% (43.04%)
Other ratings for HP
Not only did HP top my November dashboard of dividend growth stocks, it has done so for six months running!
Last week, HP reported record revenues of $985 million for the fourth quarter of 2014, up nearly 14% from the corresponding quarter in 2013. However, the company reported weaker-than-expected earnings, primarily due to weakness in its international business. Net income for the fourth quarter of 2014 was $1.53 per diluted share, compared to $1.47 during the fourth quarter of 2013. Also, for its fiscal year ending on September 30, 2014, the company reported net income of $708.7 million ($6.46 per diluted share) versus $736.6 million ($6.79 per diluted share) for its prior fiscal year ending on September 30, 2013.
HP's stock price dropped more than 7% on Thursday and Friday after the disappointing earnings announcement. With the benefit of hindsight, I should have waited to buy my shares until after HP announced earnings. However, then I would have missed out on this quarter's dividend payment of 69c per share. (HP's ex-dividend date was November 12).
I like HP's dividend yield (my yield on cost is 3.21%) and dividend growth rate (about 47% for the 5-yr CAGR), as well as its track record of increasing dividends every year for 42 years.
The softening of oil prices has created more uncertainty for drilling contractors. As a major land and offshore driller, HP has contracts with well capitalized oil majors and large independent oil companies. Term contracts and shale drilling demand have helped HP maintain a relatively high level of rig utilization, while its technologically-advanced FlexRigs provide a competitive edge, are better suited for new demands of the exploration business and command higher day rates.
Other plus points include the company's modest capital expenditure requirements and strong balance sheet and its very low leverage with a debt-to-capitalization ratio of less than 2% (as of June 30, 2014).
Challenges for HP include the impact of lower oil and gas prices, which could depress the level of exploration and production activity and, therefore, the demand for HP's services. Also, HP operates in several international regions, which accounts for about 10% of its revenues. As such, HP is exposed to risks associated with doing business abroad.
This buy is my seventh in the Energy sector and represents the 36th holding in DivGro. I now have reached my goal of owning 36 stocks in DivGro by the end of 2014.
29 shares of HP adds $79.75 of expected dividend income, increasing DivGro's projected annual dividend income to $5,317.38.
What do you think of HP? Do you own it or do you plan to buy shares? Thanks for reading!