There is no denying the fact that dividend growth stocks outperform all other types of stocks over time. The reason is simple - these stocks provide investors with a predictable source of income, but also the potential for a "raise" each time the company increases their dividend, in addition to the potential for capital appreciation. Smart investors will re-invest these dividends, dollar cost averaging the position and giving you the power of compound interest. With dividend growth stocks, you are getting compound interest, times two: the re-invested dividends plus the dividend increases.
One stock which I believe has the potential to become the next great dividend growth stock is Helmerich & Payne (NYSE:HP), which currently has a 2.89 percent dividend yield but has the ability to increase this to over 4 percent, as I will point out below.
Searching for Future Dividend Growth Stocks
When I scan through stocks that have the most potential to grow their dividend in the future, I look for several signs.
- First, I want a company that is profitable, bringing in substantial amounts of free cash flow and growing those profits each year. I believe the growth in EPS will equate to an increase in the dividend over time.
- Next, the company should have a solid balance sheet with a lot of cash and little to no debt. We want the company to be in a solid financial position, making it more likely for them to pay a dividend.
- The company should also have a low payout ratio, signaling that they have the room to increase their dividend.
Based on these criteria, I screened stocks on the following metrics:
- 5 year EPS growth rate of 10 percent and higher.
- 3 or 5 year dividend growth rate of 10 percent or higher.
- Payout ratio of less than 25 percent. A payout ratio is dividends per share divided by earnings per share. In general, the lower the ratio, the more secure the dividend.
- A debt-equity ratio of less than 1. Debt-equity is total liabilities divided by shareholders equity.
- An overall solid cash balance.
Helmerich & Payne, Inc. is one stock that stood out to me after conducting this stock screener. The company is primarily engaged in contract drilling of oil and gas wells for others, with this business accounting for almost all of the company's operating revenues.
|5 Year EPS Growth Rate||3 Year Dividend Growth||Payout Ratio||Debt-Equity||Cash Balance|
|10.43 percent||22.58 percent||6.6 percent||.05||$480 million|
HP has a hefty cash balance of $480 million and just $235 million in total debt, as of 6/30/13. Their debt-equity ratio is very low at just .05 and their payout ratio is also very low at just 6.6 percent.
I believe the company is perfectly positioned to increase their dividends further - they have a ton of cash on their balance sheet, they are generating significant amounts of cash flow each quarter, have a low payout ratio and they have very little debt on the balance sheet.
The 2-year chart for HP looks very good. The "Golden Cross" occurred in December of 2012, when the 50-day moving average crossed over the 200-day moving average. The share price remains above both the 50-day and the 200-day moving average, a positive sign which means the stock could have more room to run in the short-term.
Recent Quarterly Results
HP reported Q3 2013 results on July 26, 2013. Here are some highlights from the earnings report and other recent news from the company:
- The company reported income from continuing operations of $250,978,000 ($2.32 per diluted share) from operating revenues of $840,197,000. Included in this year's third fiscal quarter income from continuing operations were $0.86 per share of after-tax gains related to the sale of investment securities and $0.02 per share of after-tax gains related to the sale of used drilling equipment.
- Even without the sale of the investment securities, the company would have reported EPS of $1.46 a share, compared to $1.38 a year ago.
- "During the most recent quarter, the Board approved a significant increase in dividends paid to shareholders. After doubling the dividend at the end of last year, in June the dividend was increased again from $0.15 to $0.50 per share per quarter."
This is just the beginning of more future dividend increases, in my opinion. In my opinion, all of these factors point to further dividend increases.
"We are confident that our strong capital structure allows us to pursue growth opportunities and, at the same time, return meaningful cash to shareholders... our focus will remain on helping customers reduce their total well costs through applied innovations and productivity improvements, while at the same time delivering attractive returns to our shareholders," Chairman and CEO Hans Helmerich.
- It was announced on August 21, 2013 that Chief Executive Officer Hans Helmerich will retire in March and Chief Operating Officer John W. Lindsay will take over. Helmerich has been CEO since 1989 and he said the decision to step down after 25 years in charge was made with the board four years ago, so this should not come as a surprise to investors.
- The new CEO, John W. Lindsay, 52, has been the President of Helmerich & Payne Inc. since September 5, 2012 and as its Chief Operating Officer since December 7, 2010, and he joined Helmerich & Payne in 1987 as a Drilling Engineer. Based on his experience with the company, I think he is the perfect choice for the new CEO.
They are paying $2 per share in dividends annually. If the company is able to bring in full-year 2014 EPS of $6, and increases their payout ratio to 50 percent, which I think is very manageable given the company's profitability, this would result in a full-year dividend of $3 a share giving them a forward yield of 4.5 percent, much higher than the current yield of 2.88 percent.
Helmerich & Payne - The Market Share Leader in US Land Drilling
Helmerich & Payne currently operates 338 rigs, 300 in the US, 29 on international land and 9 offshore, as of September 2013. Back in September of 2001, the company had just 96 total rigs.
You'll see in the chart below that HP outperformed its peers during an industry-wide slowdown. Their profits outperformed Nabors Industries (NYSE:NBR), Patterson UTI Energy (NASDAQ:PTEN) and Unit Corp. (NYSE:UNT).
HP has a 15 percent market share, compared to PTEN's and NBR's 10 percent, and UNT's 4 percent. Other land drillers account for 54 percent.
When it comes to dividends, HP takes the grand prize - UNT doesn't pay a dividend, while NBR and PTEN have a 1 percent yield.
You'll see below that when it comes to total performance, it's not even close. With a further increase in dividends and solid earnings, I expect the share price outperformance to only continue.
In conclusion, I believe Helmerich & Payne could be the next great dividend growth stock. They are in the perfect position to return capital to shareholders - the company has a very solid balance sheet, has a ton of cash with little debt and they are bringing in substantial amounts of cash flow each quarter. The company runs a very profitable business where they are the leader in their market, and I only see better things to come.
Disclosure: I am long HP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.