Transocean's Dividend Yield Keeps Increasing At The Expense Of A Lower Stock Price

Aug.12.14 | About: Transocean Ltd. (RIG)

Summary

Deutsche Bank recently said that Transocean may need to cut its dividend soon.

The whole offshore drilling industry continues to get hammered with downgrades.

Last time I wrote about Transocean I predicted there would be pain and the prognostication came to fruition.

The last time I wrote about Transocean Ltd. (NYSE:RIG) I stated, "I'm going to continue to monitor the situation carefully because once it gets diffused I believe it can be a rough ride down for Transocean, unless earnings estimates can stabilize soon." Since the article was published the stock has decreased 12.8% versus the 1.32% drop the S&P 500 (NYSEARCA:SPY) posted. Transocean is an international provider of offshore contract drilling services for oil and gas wells by operating in the contract drilling service and drilling management services business segments.

On August 6, 2014, the company reported second quarter earnings of $1.61 per share, which beat the consensus of analysts' estimates by $0.49. In the past year, the company's stock is down 16.71% excluding dividends (down 11.41% including dividends) and is losing to the S&P 500, which has gained 14.5% in the same time frame. Since initiating my position back on August 20, 2013, I'm down 8.43% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the basic materials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 9.27, 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 11.56 is currently inexpensively priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. However, next year's estimated earnings are $3.42 per share while the trailing twelve month earnings per share were $4.27, I never like that. Next year's estimated earnings are $3.42 per share and I'd consider the stock inexpensive until about $51. 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 (%)

20Aug13

46.53

10.16

8.19

5.68

85

0.27

37.51

25Nov13

51.00

11.14

9.05

5.64

85

0.32

34.85

26Dec13

48.48

10.46

8.59

5.61

84

0.31

34.06

19Feb14

42.79

9.30

8.21

5.21

78

0.36

26.00

20Mar14

40.12

10.37

8.01

5.01

75

2.57

4.03

21Apr14

40.54

10.48

9.19

4.41

66

N/A

-0.94

20May14

41.29

9.67

11.24

3.67

55

N/A

-18.50

22Jun14

45.38

10.63

12.68

3.58

54

N/A

-16.71

11Aug14

39.57

9.27

11.56

3.42

51

N/A

-19.27

Click to enlarge

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 7.58% with a payout ratio of 70% of trailing 12-month earnings while sporting return on assets, equity and investment values of 4.7%, 9.3% and 7.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 7.58% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

20Aug13

4.81

49

2.1

4.4

5.4

25Nov13

4.39

49

2.1

4.4

5.4

26Dec13

4.66

49

4.9

10.2

5.4

19Feb14

5.23

49

4.9

10.2

5.4

20Mar14

5.58

58

4.3

8.6

7.2

21Apr14

5.53

58

4.3

8.6

7.2

20May14

5.43

52

4.7

9.3

7.2

22Jun14

6.61

70

4.7

9.3

7.2

11Aug14

7.58

70

4.7

9.3

7.2

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing off of oversold territory with a current value of 37.28. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height. As for the stock price itself ($39.57), I'm looking at the 20-day simple moving average (currently $41.31) to act as resistance and $38.68 to act as support for a risk/reward ratio which plays out to be -2.25% to 4.40%.

The Stock Is Downgraded Again!

It seems like the downgrades for this company never stop. Last week Deutsche Bank was the most recent firm to do just that, downgrade the Transocean. Though Deutsche Bank was negative on the entire offshore drilling industry, the bank called out Transocean specifically by saying that the company may be forced to cut their dividend in the near future. Transocean was cut from a "hold" rating to a "sell" and the price target was taken from $45 to $27. This downgrade has me concerned from the stance of the company potentially having to cut the dividend; the dividend was just increased a couple months ago! As of a month ago, Yahoo Finance has analyst ratings as 1 strong buy, 2 buys, 17 holds, 6 underperforms, and 6 sell ratings. If we just assume a fair valuation multiple (P/E = 15) based on the $27 price target, that means an EPS value of $1.80! That is a 47% drop from the current 2015 earnings estimate!

Conclusion

Transocean is a company which just keeps getting downgraded it seems on a weekly basis. Nobody ever likes a downgrade but it seems like all the offshore drilling contractors are just going through a rough patch right now. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates while next year's earnings estimates have continued to decrease. Financially, the dividend is huge, and I don't believe it has much room to grow. On a technical basis I actually really like the risk reward ratio right now, the movement on the relative strength index, and the bullish momentum.

Though this may seem like an excellent opportunity to buy the stock from a technical perspective, I don't buy on technicals alone. I must see that the valuations are solid, but as of now, the valuations are rocking with the motion in the ocean. I will continue to hold the stock and collect the dividend but will not be purchasing any shares at this particular moment and wait more towards the ex-dividend date (potentially later this month) to pick up some shares.

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: The author is long RIG, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.