Should I Sell Schlumberger (SLB)?

This morning, I was updating my portfolio sipping on a nice, warm cup of coffee updating my portfolio with all the madness/dividend income that has trickled in so far in March.  There is a reason why the third quarter of the month is everyone’s favorite dividend month, right?   After re-reading Lanny’s article about updating you portfolio’s P/E Ratio on a regular basis, I became inspired to review one of the stocks that I have considered selling for a while now.  I’ve been debating if the stock still fits the characteristics I look for in a dividend growth stock, so I thought today would be a perfect day to re-run Schlumberger (SLB) through the Dividend Diplomats Stock Screener and see if action is necessary.

SLB

  my initial purchase of schlumberger (SLB)

I purchased shares of Schlumberger on the final trading date of 2014.  At the time, I was motivated to sneak in one more purchase during the year so I could start of 2015 on a roll.   Looking back on my purchase article, what led me to purchase Schlumberger was the company’s position as an industry leader,  strong management team, strong balance sheet,  and the company’s dividend growth/payout ratio at the time of the purchase.  I was less focused and concerned about the fact the company had a low yield at the time of the purchase (1.8%), which has now climbed to over 2.5%!   Overall, at the time of the purchase, Schlumberger checked all of the boxes Lanny and I look for in a stock and I ran to the virtual trading window to scoop up shares before the calendar changed.

Why am I considering Selling Schlumberger?

What has changed since my initial purchase?  The company still has their strong management team and has maintained their position as industry leaders in the oil services industry.  The change is relatively easy to identify as it has caused shockwaves throughout the investing community by causing dividend cuts for one of the dividend growth investors darlings and halting dividend growth for many of the major players out there.   At the time of my purchase, the price of a barrel of oil was trading around $60/share, which isn’t too far off from today’s value.  However, in hindsight, the price of oil was spiraling downward and preparing for a sustained period of low prices.   Knowing what we know now, this caught many by surprise and forced companies to adjust their strategies, dividend plans, to account for a long period of lower prices.  I’m not going to discuss the price of oil in depth in this article or the projections about where oil may be heading down the road, considering there are plenty of other articles on the internet that are experts in the area; however, there is no doubt that the drop in the price of oil fundamentally changed my investment in Schlumberger and many other oil holdings.

Should I Sell?

Here is the dilemma I face.  Should I continue to maintain my position, or should I sell?   To figure this out, I wanted to take a hard look at the numbers and avoid the noise I’m reading about the direction the price of oil is heading.  I can’t control the price of oil nor will I ever be able to.  I’m not a fortune teller and if I were, I sure as heck would probably have chosen a different career path than public accounting.   The easiest place for me to start is to run Schlumberger through our stock screener.  So here we go.  For reference purposes, I will use the current EPS figures from the company’s most recent earnings release (Annualized quarterly Diluted EPS excluding charges and credits) and forward estimates will use the average analyst EPS from Yahoo Finance for the next fiscal year.

Metric #1:  P/E Ratio Less than the S&P 500 – Per the Wall Street journal, the S&P 500 has a current and forward P/E Ratio of 24.68X and 18.27, respectively.   Using the earnings figures cited above, Schlumberger has a current and forward P/E Ratio of 72.86X and 22.94X, respectively.  Clearly, Schlumberger is trading at higher than the market and does not pass the first metric.

Metric #2:  Payout Ratio Less Than 60%  – Currently, the company pays a $.50/quarter dividend.  This exceeds the most recent quarterly EPS per the earnings release and a 58% payout ratio using the forward earnings.  Using current results Schlumberger does not pass the metric while passing the screener using forward estimates.

Metric #3: Increasing Dividends – Lastly, before the price of oil fell, Schlumberger was building a nice dividend increase streak.  However, the company has maintained a $.50/share quarterly dividend since Q2 2015.  So the streak is over.

After running Schlumberger through our screener, it is obvious that the company does not pass the three metrics of the stock screener.  So why am I so hesitant to sell my stake in the company?  After reading reviews on Morningstar and other analyst reports, I like the fact the company has a strong economic moat.  They dominate their industry and the switching costs are very high. .  The work that Schlumberger performs is highly technical and is a key piece of other companies’ operating strategy.   Large oil companies aren’t going to simply kick Schlumberger to the curb for a low cost provider; no, the decision is much more complicated than that.    Second, an interesting piece I read in their earnings release is that the company continues to buy back their stock at the current valuations, indicating that management thinks this price is  a great value and the company is not hurting for capital.  If the company were concerned about cash or their ability to maintain their dividend, surely they wouldn’t have repurchased $116m of stock during the most recent quarter.

Summary

Here I am, still torn about what to do with my position.  Part of me says “We have a stock screener for a reason.  If you aren’t going to follow your own metrics, what’s the point of having them.”  And I understand that argument, especially considering that SLB barely met one of the three metrics.  But the other part of me understands that I own shares in a well run company with some great advantages over their competitors that is built for long term success.   But is that the type of investor that I am? That’s the million dollar question.  Going forward, I think I will continue to hold my position until the next opportunity arises.  Then, I can use the capital from this position to either continue building stakes in higher yielding companies such as Realty Income or use the money to start a new position in a company that meets the metrics of our stock screener.  After all, I just crossed the $100,000 mark in my individual portfolio and I want to keep the momentum rolling forward!  Hold on tight, because it still looks like I have some questions to answer here!

What are your thoughts on this scenario?  If you were me, would you sell my position in Schlumberger?  If not, why would you continue to hold?

-Bert

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5 thoughts on “Should I Sell Schlumberger (SLB)?

  1. I wouldn’t sell.

    I bought a bunch of oil names with the depressed oil price, which is in the high 40s now. It was $53 just a week ago, don’t you think it will go to 60, 70? Especially if anything goes wrong geopolitically. Bought KMI after they cut the dividend and that’s doing well. Imagine when they raise it again.

    The solar and wind revolution ain’t here yet.

    Look at SLB’s revenue projections
    2016 Revenue was: 27B
    2017 Estimate: 32B
    2018 Estimate: 38B

    Also think about your yield on cost. Right now you are sitting on a bunch of dividends reinvested at low prices. That’ll be worth much more if even half the revenue projections come true.

    SLB is not in trouble, it is well-run. It has struggled in the greater macro environment, which is always volatile in the short term. I think you may be letting ‘Mr. Market’ get to you.

    • Thanks for the advice Big Al. Fair point about the revenue projections. Obviously yes, if the revenue projections hold up, the company will rebound quickly and I’ll be laughing at the fact I wrote this article in the first place. But after re-reading their earnings release once again, there was a lot of positive talk from CEO that could indicate the company has weathered the storm, slimmed down, and is ready to roll.

      I am a fan of the YOC and this is a great time to re-invest at a lower dividend rate. You’ve given me some extra points to think about, so thanks for the great comment. This isn’t a simple answer here and I’m doing my best to keep the emotion out of the decision.

      Bert

  2. Personally, I hate selling and would hold. While you have strong points to sell, the part I read that sold me to hold would be that it’s a company set up for long term success and ran by great management. As most of us in our community are in it for the long haul, I try to stay focused on the long term growth and sustainability and not the current environment. I’m not against selling a bad company that I find no longer attractive 5+ years down the road. Best of luck on whichever route you take!

    • Don’t get me wrong Agent…I hate selling too. The reason you cited is why I am having such a hard time with this debate. The one thing that concerns me is the long term sustainability for any company that is tied to a commodity such as oil and the price per barrel. But that is an argument for a different day I guess! But you are right, I have to focus on the long term and not just the current market environment.

      Thanks for the great comment!

      Bert

  3. Always a great problem to have even though it is always frustrating to have to consider selling a position.

    I absolutely love SLB and have been ready to add to my position. Not only is it the absolute king in its industry, but I think that North American exploration spending will be here for a long time. Increased spending in these areas would be big for SLB and hopefully help to increase their margins.

    Great company that can be had at a fair price and has a healthy dividend that will grow in the future. I guess that goes without saying that I would hold it, but I wish you luck with your decision either way!

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