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Summary

  • At a 21% dividend payout ratio with respect to trailing twelve-month earnings, Rowan has room to grow the dividend dramatically.
  • I believe the stock remains inexpensively valued when compared to 2015 earnings estimates, albeit estimates have been cut in the past month.
  • The stock bounced off of oversold technicals in early August and is poised to rise some more if oil can also bounce.

The last time I analyzed Rowan Companies PLC (NYSE:RDC) I stated, "I like the stock and will try to scrounge up some money to buy some more in it." Since the article was published, the stock has decreased 7.88% versus the 0.51% drop the S&P 500 (NYSEARCA:SPY) posted. Fortunately, I wasn't able to scrounge up some money till near the local bottom and ended up buying shares right before they bounced off of oversold territory. Rowan is a provider of international and domestic offshore contract drilling services.

On August 6, 2014, the company reported second-quarter earnings of $0.33 per share, which beat the consensus of analysts' estimates by $0.11. In the past year, the company's stock is down 17.51%, excluding dividends (down 16.85% including dividends), and is losing to the S&P 500, which has gained 19.05% in the same time frame. Since initiating my position back on May 20, 2014, I'm down 4.69% 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 15.26, which is fairly 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 7.38 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $3.99 per share and I'd consider the stock inexpensive until about $60. The 1-year PEG ratio (0.18), 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 inexpensively priced based on a 1-year EPS growth rate of 83.67%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 25.95%. 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 (%)

17Jul14

31.97

16.56

7.59

4.21

63

0.19

86.66

18Aug14

29.45

15.26

7.38

3.99

60

0.18

83.67

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 1.36% with a payout ratio of 21% of trailing 12-month earnings while sporting return on assets, equity and investment values of 3%, 5.1% and 4.7%, 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 1.36% yield of this company alone 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 (%)

17Jul14

1.25

21

3.0

5.1

4.7

18Aug14

1.36

21

3.0

5.1

4.7

Technicals

Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing off of oversold territory back on August 7th with a current value of 40.36. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line and may about to cross above it, with the divergence bars increasing in height indicating bullish momentum. As for the stock price itself ($29.45), I'm looking at $29.87 to act as resistance and $29.32 to act as support for a risk/reward ratio which plays out to be -0.44% to 1.43%.

Dividend Reinstatement

Back in May the company reinstated its dividend policy after not paying one from 2009 through 2013. I believe the reinstatement of the dividend speaks volumes about how management views its business. Most recently, the company declared a $0.10 per share dividend with an ex-date of August 7, 2014 and pay date of August 26, 2014. The "must own" date was August 6, 2014 in order to be eligible for the ex-date. The forward yield on the dividend at the time was a measly 1.29%. I know this stock doesn't register for dividend investors because the yield is below 3%, but the prospect of raising the dividend dramatically is a great possibility.

Conclusion

The company operates in a sector which is currently loathed by Wall Street, and continually gets downgraded. But I'm taking a contrarian perspective on the offshore drilling sector by going long on this stock. The stock will also continue to drop as the price of oil continues to drop, but if in fact global growth is still intact, then we should see the price of oil begin to rebound again. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates and on earnings growth potential, but 2015 earnings estimates have decreased 5.2% in the past month. Financially, the dividend is pretty small, but has quite a bit more room to grow. On a technical basis, the risk/reward ratio shows me a bit more reward right now. Because earnings estimates have decreased in the past month I'm going to wait another month before purchasing any shares. I'd like to wait and see if estimates for 2015 earnings have stabilized before buying anymore shares.

Because I swapped out Occidental Petroleum Corporation (NYSE:OXY) for Rowan in my dividend portfolio, it is only fair that I provide an update from the swap-out date. From May 20, 2014, Rowan is down 2.25% while OXY is up 4.86%, and the S&P 500 is up 4.59%. As of now it has been a bad trade, but time will tell because I plan on holding Rowan for quite some time.

(click to enlarge)

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!

Source: Rowan Dividend Should Increase Well Into The Future