So as it turns out, Lanny was not the only Diplomat to get the itch to purchase one final stock in 2014. With the drop in oil prices, I just couldn’t hold off on purchasing a stock with their hands in the oil game, right? So which stock did I purchase? Let’s find out.
About Schlumberger Ltd
Throughout December, I have been trying to figure out how I wanted to take advantage of the decline in oil stocks (As evidenced by our recent watch list, which was oil-centric). Should I purchase another major integrated oil company such as Chevron or Exxon even though I currently hold Shell and BP? Or should I focus on an oil services company such Schlumberger, Halliburton, etc.? Judging by the title of this section and the article, I am sure you can figure out that I decided to pull the trigger and purchase Schlumberger.
To provide a little background on Schlumberger, SLB is a “supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide” per Morningstar. SLB’ operations are split into three categories: Productions Group, Drilling Group, and Reservoir Characterization Group. Without diving into a ton of detail, SLB works hand in hand with major oil and gas companies as these companies fund projects under the three product categories. While SLB competes with companies such as Halliburton/Baker Hughes (pending merger) and National Oil Well, SLB is the market leader in the industry and has more than double market cap of National Oil Well and the to be merged company of Halliburton/Baker Hughes.
Besides for the metrics, which I will discuss later, a major positive for SLB in my opinion are the benefits that come with being the best and largest in their industry. The switching costs are very high because of how closely SLB and their clients work on projects, as it would be timely/costly to bring in a new technology supplier and project manager. SLB’s services are much more than a commodity, they are a part of their client’s long-term success and strategic planning. This should protect them from short-term issues that arise or low-cost competitors that can offer SLB’s clients a cheaper fee for lower quality service.
One major risk associated with SLB is their services are tied to the research and development/exploration budgets of their customers. Since we still do not know the full impact of the recent drop in oil prices will have on the industry, SLB is exposed to a sudden decline in R&D spending by their clients if the cuts will impact their clients’ long-term projects. Again, the extent of this risk is still to be determined.
I have provided a brief summary of SLB and discussed a pro/con for SLB. So now, let’s dive into the numbers, because this is what ultimately convinced me to purchase SLB.
Financial Analysis of Schlumberger Ltd
- Dividend Yield- Currently, SLB is yielding 1.87%, which is in line with the current S&P levels. This barely meets the Diplomats’ first metric, which is to invest in a stock with a yield exceeding the average yield of the S&P. Even though it barely meets the metric, it is still in line with the market and therefore, I will proceed with the screening!
- Forward Payout Ratio. Using the current annual dividend, $1.60, and the company’s average estimated FY15 earnings, $5.16, I calculated a forward payout ratio of 31%. Right in the sweet spot. SLB has plenty of room to continue to grow their dividend going forward.
- The company’s forward P/E Ratio, assuming the estimated FY 15 EPS discussed in point #2, is 16.60. Using the ttm EPS, the company’s P/E ratio is even lower at 16.10. As a part of our stock screener, we look for companies to have a P/E Ratio lower than the broader market (~19 at the moment). Both SLB’s current and forward ratios are below the S&P 500 ratio; thus, this metric passes the screener.
- Next, I am going to look at SLB’s average dividend growth rate. Last year, SLB announce a dividend increase of 28%, bringing the 3 year average dividend increase total to 23.6%! As I wrote in my year-end portfolio assessment, I wanted to focus on adding companies to my portfolio that either have a dividend yield greater than my portfolio’s average or a dividend growth rate greater than my portfolio’s average. A growth rate of 23.6% far exceeds my portfolio’s average growth rate of ~7%.
- Currently, SLB’s 5 Year Average Dividend Yield is 1.45%, which is 43 basis points lower than the company’s current yield is 1.87%. This is a result of the company’s recent decline in share price due to the drop in oil. The higher current yield compared to average indicates that the company is potentially undervalued based on its five-year history. Great for the long-term prospects of the stock!
- The company has a strong balance sheet. Using figures provided from finviz.com, the company has cash/share of 5.25, a quick ratio of 1.70, and a current ratio of 2.10. Very strong balance sheet that will provide the company with a lot of flexibility going forward.
- In the third quarter press release, it was announced that SLB repurchase 1.3b share the third quarter. This is great news for SLB and any dividend paying stock (as we have discussed in the past), as the company’s share count was reduced, increasing EPS, and lowering the payout ratio. So there is even more room to grow their dividend going forward! Boom! Shareholder value just like that.
- One final aspect of SLB that drew me to the company, the company is expected to announce a dividend increase this coming January. With the low payout ratio and the strong balance sheet discussed in the previous bullets, I do not see any reason why the company will not continue its trend of double-digit dividend growth. While anything can happen, especially with the decline in crude oil, I am still expecting a solid increase at the end of the month.
After all the dust from my stock analysis settle, I ultimately decided jump in to the deep end and purchase 18 shares of SLB at a market price of $84.88. This purchase added $28.80 in projected dividend income to my portfolio. I am thrilled with this purchase, as I feel I have added a very strong, low yielding, high growth dividend stock to my portfolio. This stock also further diversified my exposure to the oil industry, as my only holdings were either major integrated companies or pipeline companies. Now, I own the market leader in services provided to my current holdings. One funny note about this purchase, since I initiated the position on 12/31/14, this will NOT count towards my 2015 goal of investing capital in 2015. I tried to get an exception granted from Lanny; however, he shot down my request in about two seconds. It was worth asking, right?
What are your thoughts on my purchase? Would you have added SLB to your portfolio, or would you have focused on adding a different company with oil exposure instead? Does SLB have too low of a yield to be added to your dividend portfolio? I can’t wait to hear your feedback!
DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER or ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION. THANK YOU FOR YOUR UNDERSTANDING.