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Sunday, November 16, 2014

Recent Buy: HP

Nov 11, 2014: Bought 29 shares of HP at $85.57 per share.

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%)
HP fails on only one of my selection criteria:
  • Earnings per share (EPS) percentage payout is less than 40% (43.04%)
Based on these statistics, HP earns 7 out of a possible 7 stars: (*******)

The following chart shows HP's dividend payments and earnings per share over the last 10 years. HP's EPS is growing nicely, though it seems to be somewhat cyclical. The dividend is growing steadily and is spiking rather dramatically in the last three years:

Other ratings for HP

 Zacks Rank 3-Hold
 S&P Capital IQ's Stock Report (***--) Hold
 Thomson Reuters StockReport+  (9/10) Positive 
 MorningStar Rating (***--)
 The Motley Fool's CAPS Rating (***--)

Concluding Remarks

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!


  1. Ferdi,

    Nice buy here!

    I actually took a look at HP recently for DTA and concluded the valuation was pretty compelling. Great history of dividend raises and seems to operate at a super high level.

    The only thing that concerned me was that they just very recently started paying out such a big dividend, so I worry if it might get cut if this oil price decline is protracted. In addition, most of their operations are in the US, so they're not quite as diversified as I'd like to see.

    Seems like a great buy. I recently went with a different oil services stock, but HP has a fantastic history. If I were to buy a driller, it would be HP. And I may pick up shares at some point here.

    Best regards.

    1. Hi Jason -- thanks for stopping by!

      Yes, as mentioned in my post, HP has been at the top of my monthly dashboard for 6 months running. And its the only stock that earns 7 stars in my rating system, which is reserved for the very best.

      I appreciate your concern about the rapid dividend raises. Hopefully, HP's very strong financials would see them through a period of oil price decline. HP owes practically nothing and EPS payout ratio is still low at 43%.

      Interestingly, HP is one of the stocks that is flying below the radar of most dividend growth investors. I'm betting its one of those hidden gems, so I'm happy to be an investor here. With the 7% drop since my purchase, I think it is even more compelling...


  2. With oil prices dropping, so are the prices of many stocks oil related companies. There are a lot of great bargains out there in this sector right now. Going with a dividend champion is not a bad idea...I like the buy.

    Thanks for sharing your purchase. AFFJ

    1. Thanks, AFFJ -- you're right, several energy related stocks are nearing bargain territory. That's one reason I decided to buy HP even though I'm overweight in Energy sector stocks. I think there's good value there...

      Take care!

  3. Hey Divgro,
    HP is definitely a great buy right now and I have also been watching BP.I haven't pulled the trigger yet because I have a gut feeling that oil prices might weaken a little more throughout the 2014. The only thing related to oil in my portfolio is SDRL but I would like to add and energy giant like CVX or XOM as well. Let's see what happens and good luck on your investment.

    1. Hi Dividend Mongrel!

      BP is not currently on my watch list as I look for a streak of dividend increases of at least 5 years. BP needs one more year of increases to become a candidate again.

      I think you may be right about continued weakness in oil prices. One reason seems to be geopolitical, which is a rather complex scenario that needs to play out first. Personally, though, I don't want to miss out on dividends while this happens -- and HP should weather the storm better than most, in my view.

      Thanks for commenting!

  4. Hi Divgro,

    I haven't come across this company before, but their numbers are looking very impressive. A fantastic dividend history, a nice yield and growth rate, encouraging projections, and all at a fair price. It looks like you have a very nice investment there.
    I'm based in the UK, so I'm focused on bringing up shares in the FTSE All-share for now, but I'm always open to buying shares overseas moving forward.

    All the best!

    1. Hi Huw -- as mentioned above, HP doesn't seem to be on the radar of most dividend growth investors. I've been following it for a while now, as it has topped my monthly dashboard for 6 months running. The past two months, it improved to 7 stars in my rating system, mainly because its stock price dropped to discount to fair value territory.

      I'm glad to have a UK-based reader! Personally, I'm focusing on stocks trading on U.S. exchanges, including foreign stocks trading as ADRs.

      Good luck with your investing!


  5. Ah yes, hindsight is always 20/20 on the timing. Happened to me before when trying to snag the dividend payment and the price turned around dropped on me!

    The real thing holding me back on HP is the huge increase in payout over the last couple of years. While strong increases are fantastic, they're burning up payout ratio at a unbelievable clip, so if any bump in the road occurs, they might be in a tight spot. Of course, this might be unfounded given their dividend increase history, but prior to a couple of years ago, their DG growth metrics weren't all that spectacular. From 1999-2009, they had an average increase of just 3.64%, with that number being pulled upward to 5.56% if you include 2010-2012.

    At the end of the day, they are a well run company and look to be rewarding shareholders in spades as a result of their success, so best of luck with this investment!

    1. Hi writing2reality

      Yes, we can only act on available information, which is how I rationalize my action :-). Also, HP could have had great earnings causing the price to pop 7%... you just don't know beforehand!

      Jason at Dividend Mantra has the same concern about HP's rapid payout increase over the last few years. A drop in earnings could make things challenging for HP. What I'm betting on is that with their low debt levels and reasonable current payout ratio of 43%, HP would be able to weather the storm for a few years. And if they hit a bump in the road, they can always return to smaller dividend increases for a while until things return to "normal".

      As a Dividend Champion, I have reasonable confidence in HP continuing to grow their dividend, and 3.21% is good enough for me for a long term investment...

      Take care

  6. Not sure why HP isn't more popular among the dividend growth investor blogs. It currently sports a great valuation, nice yield and extensive dividend raise history. With oil depressed it seems like any energy play is the way to go these days. Thanks for sharing.

    1. Yes, not sure why HP is not more popular... I think its a real hidden gem! The price has declined even further and the stock is now yielding 3.53%. Even better buy now!


  7. Today I also bought 27 shares of HP @ $80.6! It was my second US dividend growth investment. Earlier this year I bougth shares of Realty Income (O).
    I like the ideas behind DGI, but they are not so popular here in Germany.
    Thanks for your great work over there!

    1. Hi Alex -- thanks for stopping by and congratulations on your purchase! Good to have you as a fellow shareholder. I'm wondering why you say the ideas behind DGI are not so popular in Germany? Are there other investment vehicles that hedge against inflation and could eventually provide stable, passive income to afford financial independence?

  8. Here in Germany we have a 'special relationship' towards stocks in gereral.
    Most people like to bring their money to the local bank to get interest of less than 1%!.
    The majority of all Germans has a life insurance in which they spend a huge sum of their income to have some money back when they retire.
    We are far away from IRA's, ROTH's or 401's like you in the States!

    1. Surely, interest of less than 1% does not beat inflation! That means the savings are losing value over time...

      The life insurance sounds interesting, though I can't quite understand how that works. Is there an age when it kicks in? I have a colleague from Germany -- I'll ask him if he knows about this.

      Take care!

  9. I Just Started my Dividend Journey and bought my first stock on Friday its HP at $60.49

    1. That's an excellent entry point -- much better than mine! Congratulations on joining the dividend growth investing journey!


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