National Oilwell Varco Increases Dividend 77% - But Is It A Buy?

| About: National Oilwell (NOV)

Summary

The stock appears to be overbought at these prices.

The stock is fairly valued on earnings growth projections.

The dividend is still small for dividend investors.

The last time I wrote about National Oilwell Varco, Inc. (NYSE:NOV) I stated, "Due to the bullish technicals, high financial efficiency ratios, and inexpensive valuation based on 2015 earnings estimates, I will be pulling the trigger here right now on a small batch." After writing the article, the stock spun off its distribution business, NOW Inc (NYSE:DNOW), and is down 4.54% excluding the spin-off versus the 2.96% gain the S&P 500 (NYSEARCA:SPY) posted. Varco provides equipment and components for oil and gas drilling and production; oilfield services; and supply chain integration services to the upstream oil and gas industry worldwide.

On April 28 the company reported first-quarter earnings of $1.40 per share, which beat the consensus of analysts' estimates by $0.01. In the past year, the company's stock is up 8.46% excluding dividends and the spin-off (up 9.8% including dividends but excluding the spin-off) and is losing to the S&P 500, which has gained 18.98% in the same time frame. Since initiating my position back on Nov. 19, 2013 I'm up 5.28% with reinvested dividends, dollar cost averaging, and the spin-off. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth buying more shares of the company right now for the basic materials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 13.52, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 11.08 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.88 per share and I'd consider the stock inexpensive until about $103. The 1-year PEG ratio (1.08), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 12.47%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 12.47%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 11.18%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

05De13

81.85

14.99

13.03

6.28

94

0.87

17.14

06Jan14

79.49

14.56

12.72

6.25

94

0.88

16.59

06Feb14

74.17

13.41

11.98

6.18

93

0.86

15.53

06Mar14

78.23

14.41

11.22

6.97

105

1.05

13.68

06Apr14

78.96

14.51

11.31

6.98

105

1.05

13.77

05May14

79.88

5.04

11.64

6.86

103

0.42

12.14

05Jun14

76.25

13.52

11.08

6.88

103

1.08

12.47

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Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.41% with a payout ratio of 33% of trailing 12-month earnings while sporting return on assets, equity and investment values of 7%, 11% and 9.5%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.41% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 6 years. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

05Dec13

1.27

19

7.0

11.2

10.8

06Jan14

1.31

19

7.0

11.2

10.8

06Feb14

1.40

19

7.0

11.0

8.7

06Mar14

1.33

19

6.8

10.9

9.4

06Apr14

1.32

19

6.8

10.9

9.5

05May14

1.30

7

19.6

31.1

9.5

05Jun14

2.41

33

7.0

11.0

9.5

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Technicals

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Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory with a current value of 70.36 with upward trajectory since after reporting earnings on 28Apr14. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars flattening in height, indicating the bullish momentum is getting tired. As for the stock price itself ($76.25), I'm looking at $77.58 to act as resistance and $75.68 to act as support for a risk/reward ratio, which plays out to be -0.75% to 1.74%.

Recent News

  1. The company spun off its distribution business as an independent publicly traded company, NOW Inc. (DNOW). Merrill Miller Jr. is moving out f the Executive Chairman position from Varco and taking the same position at NOW Inc.
  2. Varco increased its dividend by 77%! A huge dividend increase of this nature signals the company is very happy with its growth prospects for the long term and I wouldn't doubt they will continue to raise it in the future.
  3. The $0.46 per share quarterly dividend will have an ex-date of June 11, 2014 and pay date of June 27, 2014 for a forward yield of 2.29%.

Conclusion

I really like this stock; it's definitely one of my top ten in terms of quality and size within my dividend portfolio. Fundamentally, the company is inexpensively priced based on next year's earnings estimate and fairly priced on future growth potential while sporting excellent near- and long-term earnings growth potential. Financially, it has an okay dividend which was increased dramatically but I'd like it to yield a bit more. On a technical basis, I believe the stock to be overbought at this time. Due to the overbought technicals, fair valuation on next year's earnings growth potential, and small dividend yield, I will not be pulling the trigger on this name right now but definitely will be on any pullback.

Because I swapped out Eaton Corp. plc (NYSE:ETN) for Varco in my dividend portfolio, it is only fair that I provide an update from the swap-out date. From 19Nov13, Varco is down 8.63%, while Eaton is up 2.06% and the S&P 500 is up 8.31%. The results appear to be deceiving because the sharp correction to Varco in June was due to the spin-off of the distribution business, and as noted above I'm up 5.28% on the investment.

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Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long DNOW, NOV, SPY. 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.