The markets are going to remain volatile for many months to come and given that investors in general hate volatility; it is easy to understand why so many have been gravitating towards investments that offer steady dividend payments. We are going to look at five stocks in the basic material's sector that we think dividend investors would find attractive.
Our two favourites are SeaDrill Limited (SDRL) and Linn Energy LLC (LINE). As worldwide demand for oil continues to rise, the demand for SeaDrill's services will continue to grow. SDRL has also produced an impressive 3 year rate of return in excess of 400%, continues to grow revenue at a very healthy clip of 12% a year, and has a very impressive 3 year dividend growth rate of 115%. LINE increased production by 30% in 2011, and is set to increase production by another 40% in 2012; it also has a very impressive three-year total rate of return in excess of 250%, and lastly, it has a quarterly revenue growth rate of 32%.
Two other noteworthy companies are Vale S.A. (VALE) and Freeport-McMoRan Copper & Gold Inc (FCX). VALE has a yield of 7.40%, a five-year dividend growth rate of 66.9%, a five-year dividend average of 2.7%, a three-year total return of 73%, a payout ratio of 28%, a quarterly revenue growth rate of 9.10%, and it has been paying dividends since 2002. Net income for the last three years is as follows; for 2008, it was $13.2 billion, for 2009 it was $5.3 billion and in 2010, it soared to $17.26 billion.
FCX has a yield of 2.7%, a three-year dividend growth rate of 41.5%, a five-year dividend average of 3.8%, a three-year total return of 216%, a payout ratio of 47%, a quarterly revenue growth rate of 0.8%, and it has been paying dividends since 1994. Net income has improved nicely for the last three years; for 2008, it was negative $11 billion, in 2009 it turned positive to $2.5 billion and in 2010, it jumped up to $4.23 billion. Investors who are more conservative in nature and are looking for companies with stellar records of consecutively increasing their dividends will find our latest Dividends Champs article to be of interest. In this article only companies with a history of consecutively increasing their dividends for 50 years or more were examined. In contrast, investors who are willing to take on more risk might find this article to be of interest 5 Contrarian Speculative Stock Plays.
Levered free cash flow rates have been provided when available. Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a small amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa. Earnings can often be manipulated via accounting gimmicks, but it's much harder to fake cash flow. As a result, many investors feel that free cash flow provides a better picture of a company's ability to generate cash. Negative free cash flow numbers do not necessarily bode badly for the company in question, for it could be a sign that a company is making large investments, which could lead to big payoff in the future.
Stock | Yield | Market Cap | Forward PE | EBITDA | Operating Margin | Quarterly revenue growth | Revenue | Cash flow |
9.8% | 14.8 | 9.9 | 2.32B | 40.9% | -3.7% | 4.3B | 1.76B | |
7.30% | 6.5B | 17 | 1.10B | 92.3% | 32.8% | 792M | 573M | |
8.6% | 25B | 10.2 | 3.92B | 53.9% | 38.8% | 6.65B | 2.14B | |
7.8% | 5.3B | 18 | 650.1M | 37% | 4.4% | 1.14B | 455M | |
10.5% | 10.6B | 3.57 | 3.40B | 34.18% | 7.4% | 8.52B | 1.55B |
SeaDrill Limited
SDRL is an offshore drilling contractor, provides offshore drilling services to the oil and gas industries worldwide. It also offers platform drilling, well intervention, and engineering service.
It has an enterprise value of $24.26 billion, an incredibly strong 3 year dividend growth rate of 115%, and a quarterly revenue growth rate of -3.7%, a very impressive total rate of return for the last 3 years of 419%, and has been paying dividends since 2008.
Quarterly earnings growth rate (year over year) has turned negative; the current figure is -90%. As long as SDRL can secure new contracts and the demand for its services remains strong it should have no problem meeting its dividend requirements. However, if the outlook should suddenly change, it could find itself in a tight financial position. Given that the worldwide demand for oil is still strong the outlook for SDRL should remain bright as the rates for its services continue to rise. It is currently growing earnings at an annual rate in excess of 12% a year and given that demand for it services remains strong is projected to continue growing earnings at the rate of 12% or higher for the next 5 plus years. Here are some highlights of SDRL'S 2011 achievements:
- SeaDrill generates third quarter 2011 EBITDA*) of US$612 million
- SeaDrill reports third quarter 2011 net income of US$58 million and earnings per share of US$0.07
- SeaDrill resolves quarterly cash dividend per share of US$0.76
- SeaDrill completes the divestment of the jack-up rig West Juno and records a US$23 million gain on sale
- SeaDrill secures two three-year contracts for two jack-ups with a revenue potential of US$348 million
- SeaDrill secures a four-year contract with a revenue potential of US$787 million for the ultra-deepwater semi-submersible rig West Hercules
- SeaDrill acquires a 33.75 percent ownership stake in Asia Offshore Drilling Ltd through a private placement
- SeaDrill participates in two private placements in Archer Limited and increases its ownership to 39.9 percent
- SeaDrill secures contracts with a total revenue potential of US$1.6 billion for the ultra-deepwater rigs West Capricorn, West Leo and West Aquarius
- SeaDrill secures contracts with a total revenue potential of US$115 million for the jack-up rigs West Ariel, West Callisto and West Prospero
- SeaDrill raises US$950 million in debt through two new secured credit facilities
Additional facts on SDRL:
- ROE 31.43%
- Return on assets 6.3%
- Total debt $13.79B
- 200 day moving average $32.54
- Book value $8.76
- Dividend yield 5 year Average N/A
- Dividend rate $2.89
- Dividend growth rate 3 year average 115%
- Consecutive dividend increases 1 years
- Paying dividends since 2008
- Total return last 3 years 419%
Linn Energy LLC
LINE is organized as MLP (master limited partnership) and is an independent oil and natural-gas company, engaged in the development and acquisition of oil and gas properties in the United States. Its mission is to acquire, and develop a growing portfolio of long life oil and natural-gas assets and in the process maximize cash flow. LINE has grown from a company that managed a handful of wells to a multi-billion dollar entity that is among the top 20 independent US oil and natural-gas development companies in the U.S. It managed to increase production by roughly 30% in 2011, and is set to increase it by 40% in 2012.
LINE has a five year dividend growth rate of 22.45%, a decent quarterly revenue growth rate of 32.8%, a five year dividend average of 10.70%, a total rate of return for the last three years of 257%, a dividend rate of $2.76 and has been paying dividends since 2006. Finally, it has positive levered free cash flow rate of $189 million.
Potentially positive developments
LINE plans to spend $880 million in 2012 to drill and or participate in 340 wells and expects to increase production by another 40% in 2012. Linn Energy said it expects 2012 production to go up by 40 percent, as it adds fresh production from assets it acquired in the current year.
In the 3rd quarter Linn Energy announced that it purchased over 500,000 shares at an average price of $32.76.
Insider transactions
Director T. Jacobs purchased 30,000 shares in Aug at 32.76-34.00 a share. Director A. Walker purchased 4000 shares at 31.76-32.85 a share on the 8th of August. Officer Mark Ellis purchased 5000 shares at $32.76 a share. The full list of insider transactions can be accessed here.
- ROE 11.9
- Return on assets 6.96%
- Total debt $ 3.12B
- Book value $21.00
- 200 day moving average $37.43
- Dividend rate $2.76
- Payout ratio 169%
- Dividend yield 5 year Average 10.7%
- Dividend growth rate 5 year average 22.45%
- Consecutive dividend increases 1 year
- Paying dividends since 2006
- Total return last 3 years 257%
- Total return last 5 years 48%
Southern Copper Corp. (SCCO)
It engages in mining, exploring, smelting, and refining copper ores in Peru, Mexico, and Chile. SCCO has an enterprise value of $24.99 billion, a very strong five year dividend growth rate of 53.4%, an impressive quarterly earnings growth rate of 81.6%, a quarterly revenue growth rate of 38.8%, a five year dividend average of 6.6%, a total rate of return for the last three years of 121%, and has been paying dividends since1994.
Net income for the last three years is as follows; in 2008, it was $1.4 billion, in 2009 it dropped to $929 million and in 2010 it surged up to $1.5 billion. For 2011 so far, net income is $1.8 billion. SCCO also has a very strong levered free cash flow rate of $1.53 billion.
- ROE 57.32%
- Return on assets 28.73%
- Total debt $2.75B
- 200 day moving average $30.87
- Book value $4.89
- Dividend yield 5 year Average 6.60
- Dividend rate $2.46
- Dividend growth rate 5 year average 53.4%
- Dividend growth rate 3 year average 83.9%
- Consecutive dividend increases 1 years
- Paying dividends since 1996
- Total return last 3 years 121%
- Total return last 5 years 96%
Boardwalk Pipeline Partners, LP (BWP)
It has enterprise value of $8.46 billion, a positive levered free cash flow rate of $177 million, a Quarterly revenue growth (yoy) of 4.4%, a five year dividend growth rate of 10.8%; it has increased dividends for four years in a row, and it has a strong three year rate of return of 75%. Insiders have a solid 53.4% stake in the company. Net income for the past three years is as follows; in 2008, it came in at $294 million, in 2009 it dropped down to $162.7 million and in 2010, it moved up to $289 million. The full upgrade and downgrade history can be accessed here.
- ROE 7.2%
- Return on assets 3%
- Total debt 3.2B
- 200 day moving average $26.97
- Book value $16.04
- Dividend yield 5 year Average 7.3%
- Dividend rate $2.19
- Payout ratio 171%
- Dividend growth rate 5 year average 10.8%
- Consecutive dividend increases 4 years
- Paying dividends since 2006
- Total return last 3 years 75%
- Total return last 5 years 23%
Companhia Siderurgica Nacional (SID)
It primarily operates as an integrated steel producer in Brazil and Latin America. The company principally produces carbon steel and various steel products.
SID has a five year dividend growth rate of 12.36%, a quarterly earnings growth rate of 52%, a quarterly revenue growth rate of 7.4%, a five year dividend average of 6.7%, a total rate of return for the last three years of 39%, a dividend rate of $0.64 and has been paying dividends since1994.
Net income for the last three years is as follows; in 2008 it was $2.65 billion, in 2009 it dropped to 1.5 billion and in 2010 it was virtually unchanged from $1.51 billion. Gross profits for the same time period are as follows; in 2008 they stood at $3.58 billion, in 2009 they stood at $2.26 billion and in 2010, they jumped up to $4.07 billion.
Potential negative
It has a negative levered free cash flow rate; currently its levered free cash flow rate is -$1.32 billion
- ROE 40.16%
- Return on assets 8.26%
- Total debt 14.94B
- 200 day moving average $9.73
- Book value $3.08
- Dividend yield 5 year Average 6.70
- Dividend rate $0.64
- Dividend growth rate 5 year average 12.36%
- Consecutive dividend increases 0 years
- Paying dividends since 1994
- Total return last 3 years 39%
- Total return last 5 years 107%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Do not treat this as a buying list. It is very important that you check the finer details in each of the mentioned plays before investing any capital in them. Some investors are happy with taking enormous amounts of risks, while others are bothered by the slightest degree risk; it is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.
