Our strategy is to invest in dividend growth stocks. So much of our emphasis on this website is finding companies that have demonstrated their ability to grow their dividend over time. If you don’t believe us, check out the three pillars of our infamous Dividend Stock Screener! But as I continue to monitor and review our portfolio, there is one stock that jumps off the page at me. That company is Schlumberger (SLB). No, it isn’t because the company hasn’t increased their dividend in several years. It is because I am asking myself a much more tragic question after reviewing the numbers closely. Is Schlumberger’s dividend safe?
Schlumberger has long been a thorn in my side. I purchased shares of the company at the end of 2014, after the company increased their quarterly dividend from $.40 per share to $.50 per share. Talk about a dividend increase! Since then, though, it has been a volatile ride. Currently, I am down over 50% on this position. It could be worse actually. Imagine what the loss would be if I didn’t reinvest my dividends? With such a large loss staring me in the face, I figured it was a great time to take a look at some of the numbers for the company.
First, I took a look at the company’s dividend growth. Or should I say, the lack of the company’s dividend growth. The company’s last dividend increase was Q4 2014; right before I purchased shares! Since then, the company has maintained a $.50 per share quarterly dividend. What on earth happened that caused four years of a stagnant dividend?
The price of crude began to slide in 2015 before bottoming out in 2016. The sudden drop in the price of crude caused upheaval in the oil industry. The major oil companies found themselves slashing future projects and cleaning up their balance sheets quickly due to declining revenues. Schlumberger, a company that provides services for major oil companies, was impacted by these actions. Like other companies, SLB maintained their dividend as opposed to cutting their dividend, rightly assuming the price of crude would rebound and projects would return.
The price of crude began to rise once again in 2017 and 2018 and things began looking promising in the oil sector. With cleaner balance sheets, major oil companies were looking to spend again. And with higher crude prices, revenues were set to increase. All were supposed to be great news for Schlumberger. Then, the price of crude plummeted once again at the end of 2018.
Source of Crude Oil Price charts: Marcrotrends.net
With the second decrease in crude oil, Schlumberger’s stock price has fallen from the consistent $60- $70 per share range that the company was operating in to the $30-$40 per share. The company has reported revenue decreases in recent quarterly filings and the outlook appears to signal more of the same.
The company’s dividend is well over 5% at the current share price. While I am excited about the current dividend yield, what concerns me is the company’s dividend payout ratio. In our stock screener, we use a 60% dividend payout ratio. We believe this is the appropriate level for a company to continue to grow their dividend without sacrificing the long-term safety of the dividend. When I crunched the numbers recently for Schlumberger, they were alarming. The chart below shows SLB’s dividend payout ratio over the last five quarters.
The fact that the company’s dividend payout ratio has consistently exceeded 100% over the last five quarters is alarming to me. I understand that some investors will use other metrics, such as EBITDA or adjusted earnings, in their calculation. However, the true GAAP figure is showing a trend that is causing alarm bells to ring in my head.
How on earth can Schlumberger maintain their current dividend if their current earnings cannot cover it? Is Schlumberger’s dividend safe? Right now, the numbers are not adding up.
There are obviously several ways to obtain a more reasonable dividend payout ratio. Increase your earnings or decrease your dividend. The concerning aspect is the former of the scenarios. Reading SLB’s recent earnings release did not provide me with the comfort that their revenue is going to suddenly increase. YOY decreases are reported and future investments are discussed. But the level of future investments is far from certain and depends on a lot of macroeconomic factors. In this current environment, who knows what tomorrow is going to bring. Let alone the next 12 months. It just seems unlikely to me that the company’s revenues and income will increase enough to push their dividend payout ratio below 100%.
With that in mind, the other scenario is the dreaded dividend cut. Obviously we hate to see this on our website. Having gone through the massive Kinder Morgan and Kraft-Heinz dividend cuts of the past, the last thing I want is to have another one occur. But if the company’s results do not improve and the company does increase future revenue sources, it may have no other choice but to cut their dividend. At some point, a payout ratio above 100% is not sustainable and something has to give.
This is why I started the article out by asking myself one simple question. Is Schlumberger’s dividend safe? We will find out the answer soon, as the company releases their earnings shortly. Now, I have to figure out what I want to do with this position in my portfolio.
Do you own shares of Schlumber? Do you think Schlumberger’s dividend is safe? What are your thoughts about the company’s dividend payout ratio? Would you hold on to the ocmpany or sell if you were me?
Bert