National Oilwell Varco, Inc. (NYSE: NOV) announced its regular quarterly dividend of $0.26/share on February 27, 2014 payable to shareholders of record on March 28, 2014. The company has been paying regular quarterly dividends over the years. In the last year alone, the company has increased its dividend by 100% to $0.26/share. With the recent dividend announcement, NOV stock surged 3.13%. The company's continued investment in technology, new products, facilities and in growth opportunities allowed it to return significant cash to shareholders both in the form of cash dividends and share buybacks.
Let's dig into the company business model, strategy and financial position to discern its ability to sustain consistent returns for investors.
Can National Oilwell Varco Sustain Its Dividends?
National Oilwell Varco is a leader in the design, manufacture and sale of equipment and components used in oil and gas drilling and production; oilfield services; and supply chain integration services to the upstream oil and gas industry. The company operates in three business segments: Rig Technology, Petroleum Services & Supplies and Distribution and Transmission. However, it is planning to spin-off its Distribution and Transmission segment in order to focus more on its core businesses. After the proposed spinoff, they will have a relatively strong business model which will enhance operational efficiencies.
The company is making strong capital investments in its other two segments in order to expand its product portfolio, technology and facilities. These investments, including strategic acquisitions of Ameron and Robbins & Myers led the company to generate record revenues, with a record order backlog which ultimately resulted in large cash flows for NOV. Also, with the steady improvement in the economy, most oil and gas companies are increasing investments which result in increased demand for the equipment and services that National Oilwell Varco provides. Consequently, the company has been able to generate solid growth in its top line over the year. Its main operating segments, Rig Technology and Petroleum Services & Supplies are generating solid growth quarter over quarter.
At the end of the most recent quarter, Rig Technology generated 16% growth over Q3 and a 14% increase over the prior year's quarter. Petroleum Services & Supplies segment has built momentum as in the most recent quarter it generated 6% growth. For the full year 2013, the company's consolidated revenue reached $22.7 billion; an increase of 14% over the prior year of $20 billion. National Oilwell Varco has the ability to turn higher revenue growth into higher earnings. Its full year net income was $2.33 billion, or $5.44 per fully diluted share. Solid top and bottom line growth continues to enhance the company's cash generating potential.
NOV remains in a strong financial position, with cash available to reinvest in its existing businesses, strategic acquisitions and capital expenditures in order to meet both short- and long-term objectives. At the end of fiscal 2013, it had cash and cash equivalents of $3.436 billion, and total debt was standing at $3.150 billion. Consequently, it has very high current ratio of 2.57, which means the company has 2.57 times more cash available to meet short-term liabilities. The company's debt-to-equity ratio of 0.1 is well below the industry average of 0.4.
Further, National Oilwell Varco has been generating a significant amount of cash flows from operations which adequately cover both capital requirements and dividend payments. At the end of 2013, its operating cash flows stood at $3.3 billion when capital expenditures were only $669 million and dividend payments are only at $389 million. Consequently, free cash flows are high at $2.7 billion. The company's ability to pay dividends not only looks completely safe but it has significant potential for future dividend increases as both operating and free cash flows increase and continue to provide adequate cover to NOV's dividend payments. Currently, the company is paying only 16.7% of net income in dividends which offers a lot of room for more increases.
After spinning off its lesser performing Distribution and Transmission segment, NOV can focus more on its other two segments; Rig Technology and Petroleum Services & Supplies segments which both have momentum due to recent acquisitions and investments in products and facilities. The company is in a solid financial position to sustain its dividends. I firmly believe it will make a significant increase in its dividends in this current year as they did in 2013.
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.