High dividend yield stocks are always very attractive to investors. However, a high dividend yield does not imply that the stock will be able to pay high dividends in the future as well. Let us analyze Seadrill Ltd (NYSE:SDRL) that pays a dividend yield of 10.33 percent to its investors while the industry is paying only 2.33 percent. Since the dividends are dependent upon the earnings that also depends upon the revenues in order to figure out whether Seadrill will be able to sustain high dividends one must analyze the growth in the top line. Let's start with the revenue mix that will help us understand the revenue generating sources of the company.
The company generates its revenues from three different sources. Contract revenues is the largest contributor to the revenues. It contributed nearly 93 percent in total revenues during the first nine months of fiscal year 2013. Reimbursement revenues are second with a contribution of approximately 6 percent to the total revenues during the same period. The remaining 1 percent came from other sources.
SOURCE: SEC Filings
The most important point to discuss is the revenue backlogs of Seadrill. The backlogs of the company provide a clear vision about the future. As of November 22, 2013, the company has a total backlog of $19.5 billion that excludes the West Aquarius extension and the PEMEX Heads of Agreement. As shown in the following chart its floater fleet contributes $16 billion, its jack-up fleet contributes $3 billion, and tender units contribute $500 million to total backlogs.
As shown in the following bar chart, the backlogs of $0.6 billion are expected to convert into revenues during the remainder of fiscal year 2013. Looking forward, one can clearly see that the company will be able to convert backlogs into revenues of $5.8 billion during fiscal year 2014. Nearly $4.7 billion of the total current $19.5 billion backlogs are expected to convert into revenues so the company will experience a decent growth in the revenues.
SOURCE: Company Presentation
After looking at these figures it is clearly evident that the revenue growth is quite substantial and is expected to continue into the future. The key thing to notice is that this is the distribution of current backlogs that are expected to convert into cash. With the passage of time the company will definitely receive new contracts that can also be converted into revenues.
As the growth in revenues is expected to be quite high I do not believe that investors should be worried about the high dividend sustainability as the growth in the top line will bring the growth in cash flows as well as the bottom line.
Sometimes EBITDA is used as proxy for cash flows, therefore, let's analyze the EBITDA of the company. As shown in the following table, the EBITDA of the company is expected to rise significantly over the next few years and will also result in an increase in the EBITDA margin with the passage of time. At this level, the company has an EBITDA margin of 51.39 percent and that is already quite high. In the future, this margin is expected to further increase. Therefore, I do not believe that investors should be worried about the requirement of cash in the future as the company expects to experience decent growth in revenues and EBITDA. The company currently has an EBITDA of $2.56 billion in the trailing twelve months and this is expected to rise to an annualized EBITDA of nearly $4.56 billion in fiscal year 2016.
SOURCE: Company Presentation
As far as cash position is concerned, the company had total cash of $867 million during the most recent quarter and its revenues and cash flows prospects seem good therefore I believe that investors will be satisfied with the cash position of the company.
Another key thing that is keeping investors away from investing in the stock is its debt. The company has a total debt of $12.73 billion as of September 30, 2013 whereas most of the debt is expected to mature after fiscal year 2015. Therefore, I believe that the high contract backlogs will make debt refinancing for the company easier. Strong growth in EBITDA and revenues will help the company to pay high dividends as well as debt in the years to come.
The company has a PEG ratio of less than 1. The PEG ratio of Seadrill is 0.67 times which is lower than that of the industry average of 1.46 times. Moreover, the company has a bright future outlook. Its strong backlogs and ability to generate cash flows will enable the company to sustain its high dividends. Although, the dividend yield is quite high which is sometimes perceived as a negative point by investors because high dividend yield is difficult to sustain, I believe it is because of the recent dip in the stock price. As long as the company expects high growth in revenues investors should not be worried about the sustainability of high dividends in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.