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Arie Goren
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Arie Goren has been, for many years, a global analyst for “Clal Finance Ltd.”, one of the biggest Israeli investment companies. He has many years of experience in the American Equity Market and in the Global Commodity Market. Goren has conducted much research on investment in equities and... More
  • A Good-Yielding, Lower-Risk Dividend Portfolio That Has Outperformed The Market 2 comments
    Jan 29, 2014 2:59 PM | about stocks: NBR, PDS, PTEN, UNT, HP

    I tried to create a good-yielding stock portfolio that can outperform the market by a big margin, but at the same time, would have a very low risk. The following screen shows such a promise. I have searched for highly profitable companies that pay solid dividends with a very low payout ratio. Those stocks also would have to show a very low debt.

    The screen's method that I use to build this portfolio requires all stocks to comply with all following demands:

    1. The stock does not trade over-the-counter (OTC).
    2. Price is greater than 1.00.
    3. Market cap is greater than $100 million.
    4. Dividend yield is greater than 2.0%.
    5. The payout ratio is less than 40%.
    6. Total debt to equity is less than 0.40.
    7. The ten stocks with the lowest payout ratio among all the stocks that complied with the first six demands.

    I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance, Portfolio123 and finviz.com.

    After running this screen on January 28, 2014, before the market open, I discovered the ten best stocks, which are shown in the charts below. Since the second stock in the list, Helmerich & Payne Inc. (NYSE:HP), is one of my holdings, and I have done a thorough research on the company, I describe this stock in this article

    (click to enlarge)

    The table below presents the dividend yield, the payout ratio, the forward P/E and the total debt to equity for the ten companies.

    (click to enlarge)

    Helmerich & Payne Inc.

    The Company

    Helmerich & Payne, Inc. is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor with land and offshore operations in the United States, Ecuador, Colombia, Argentina, Tunisia, Bahrain and United Arab Emirates. It specializes in deep drilling in major gas producing basins of the U.S., and in drilling for oil and gas in remote international areas. Helmerich & Payne, Inc. was founded in 1920 and is headquartered in Tulsa, Oklahoma.

    As of January 08, 2014, the company's activity included 347 rigs; 309 rigs in U.S. land operation, 9 rigs offshore and 29 rigs international land. In addition, the company had 19 rigs under construction.

    (click to enlarge)

    (click to enlarge)

    Source: Goldman Sachs Global Energy Conference

    Valuation Metrics

    The table below presents the valuation metrics of Helmerich & Payne, the data were taken from Yahoo Finance.

    H&P's valuation metrics are good; the company has a very low debt, the trailing P/E is very low at 12.63 and the forward P/E is also low at 13.87. The Enterprise Value/EBITDA ratio is very low at 6.43.

    Helmerich & Payne has recorded strong revenue, EPS and dividend growth, during the last year, the last three years and the last five years, as shown in the table below.

    Source: Portfolio123

    Competitors and Group Comparison

    According to Helmerich & Payne, its main competitors are Patterson-UTI Energy Inc. (NASDAQ:PTEN), Nabors Industries Ltd. (NYSE:NBR), Precision Drilling Corporation (NYSE:PDS) and Unit Corporation (NYSE:UNT). H&P has been capturing market share, its active rigs in U.S land market share increased from 9% in 2008 to 15% in 2013.

    (click to enlarge)

    Source: Goldman Sachs Global Energy Conference

    A comparison of key fundamental data between H&P and its main competitors is shown in the table below, the data were taken from Yahoo Finance.

    H&P's valuation metrics are better than those of NBR and PTEN, but the smaller UNT has a lower PEG ratio.

    The tables below compare various H&P's parameters to its industry median, its sector median and the S&P 500 median. In most parameters of growth rates, margins, return on capital and financial strength H&P is better.

    Source: Portfolio123

    Dividend

    Helmerich & Payne has been paying uninterrupted dividends since 2007. The forward annual dividend yield is at 2.30%, and the payout ratio is only 12.9%. The annual rate of dividend growth over the past three years was extremely high at 83.27% and over the past five years was also very high at 47.66%.

    HP's dividend is paid each quarter, as shown in the charts below.

    Ex-Dividend Date

    Payment (US$)

    2/13/2007

    0.045

    5/11/2007

    0.045

    8/13/2007

    0.045

    11/13/2007

    0.045

    2/13/2008

    0.045

    5/13/2008

    0.045

    8/13/2008

    0.050

    11/12/2008

    0.050

    2/11/2009

    0.050

    5/13/2009

    0.050

    8/12/2009

    0.050

    11/10/2009

    0.050

    2/10/2010

    0.050

    5/12/2010

    0.050

    8/11/2010

    0.060

    11/10/2010

    0.060

    2/11/2011

    0.060

    5/11/2011

    0.060

    8/11/2011

    0.070

    11/10/2011

    0.070

    2/13/2012

    0.070

    5/11/2012

    0.070

    8/13/2012

    0.070

    11/13/2012

    0.070

    2/13/2013

    0.150

    5/13/2013

    0.150

    8/13/2013

    0.500

    11/13/2013

    0.500

    In December 2013, the company increased its quarterly dividend to $0.625 per share from $0.500 per share.

    Latest Quarter Results

    On November 14, Helmerich & Payne reported its fourth-quarter fiscal 2013 financial results, which beat EPS expectations by $0.06 and was in-line on revenues. The company reported record income from continuing operations of $721.5 million ($6.65 per diluted share) and record operating revenues of $3.4 billion for its fiscal year ended September 30, 2013, compared to income from continuing operations of $573.6 million ($5.27 per diluted share) from operating revenues of $3.2 billion during the prior fiscal year ended September 30, 2012.

    In the report, Chairman and CEO Hans Helmerich commented:

    We are pleased to have once again delivered record levels of revenue and operating income during the most recent quarter. Our fiscal 2013 results have also been record-breaking, even if we exclude almost $100 million in after-tax gains from the sale of investment securities. During the last few months we have commented on encouraging signs in the market. Including those announced today, we are pleased to have reported a total of 13 new build orders with customer commitments since the beginning of our 2014 fiscal year. We believe customers are now planning to incrementally increase their development efforts and drilling activity with a continued focus on drilling rig capabilities and efficiencies. As has been the case for a considerable time, these trends clearly work to H&P's advantage. We look forward to continuing to help our customers lower their drilling costs through steady productivity gains and performance improvements.

    Next Quarter Results

    Helmerich & Payne will report its first-quarter year 2014 financial results on January 30. HP is expected to post a profit of $1.46 a share, a $0.06 rise from the company's actual earnings for the same quarter a year ago.

    Technical Analysis

    Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.

    (click to enlarge)

    Chart: finviz.com

    The HP stock price is 1.31% above its 20-day simple moving average, 5.26% above its 50-day simple moving average and 23.38% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.

    (click to enlarge)

    Chart: TradeStation Group, Inc.

    The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.31, and descending, which is neutral (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 74.09 which indicate overbought conditions.

    Analyst Opinion

    Analyst opinion is divided, but most analysts recommend the stock. Among the twenty seven analysts covering the stock, five rate it as a strong buy, seven rate it as a buy, thirteen rate it as a hold, and only two analysts rate it as an underperform.

    Discussion

    Currently there is rig oversupply in the U.S., natural gas drilling declined due to low prices, but drilling activity for oil is increasing. Nevertheless, H&P's rig utilization has held up better than many peers with older, less efficient conventional rigs. H&P has a most modern and capable land drilling fleet and it plans to continue a build two rigs per month through the rest of the fiscal year. H&P's Flexrigs are the industry standard and appear to have steady demand from E&P companies. Well drilling complexity in the U.S. is increasing; Horizontal and directional wells make up over 75% of wells drilled in the country and multi-well pad drilling gaining acceptance in more areas, this all creates an expanding level of demand for FlexRigs (89.3% of H&P's U.S. land fleet).

    Risk

    Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, and lower oil and natural gas prices.

    Conclusion

    Although H&P's stock has risen 53.2% since the beginning of 2013; this compared to 24.9% rise of the S&P 500 index, and 35.2% rise of the Nasdaq Composite Index at the same period, it still has plenty of room to go up. Helmerich & Payne has recorded strong revenue, EPS and dividend growth, and it continues to capture market share. The company has compelling valuation metrics and solid earnings growth prospects. Furthermore, H&P has a strong balance sheet and a low debt, its Enterprise Value/EBITDA ratio is very low at 6.43.

    Helmerich & Payne has been paying uninterrupted dividends since 2007. The forward annual dividend yield is at 2.30% (2.91% if we consider the next declared dividend of $0.625), and the payout ratio is only 12.9%. The annual rate of dividend growth over the past three years was extremely high at 83.27% and over the past five years was also very high at 47.66%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and H&P's performance has been quite impressive in this respect.

    All these factors bring me to the conclusion that HP stock is a smart long-term investment.

    Back-testing

    In order to find out how such a screening formula would have performed during the last year, last 5 years and last 15 years, I ran the back-tests, which are available by the Portfolio123's screener.

    The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

    Since some readers could not get the same results that I got in some of my previous posts, I am giving, in the charts below, the Portfolio123 exact codes which I used for building this screen and the back-tests. The number of stocks left after each demand can also be seen in the chart. I am also giving a table which readers can use to copy and paste codes directly into the Portfolio123's screener.

    (click to enlarge)

    (click to enlarge)

    Universe(NOOTC)=TRUE

    Close(0)> 1

    MktCap > 100

    Yield > 2

    Between(PayRatioTTM,1,40)

    DbtTot2EqQ < 0.4

    One year back-test

    (click to enlarge)

    Five years back-test

    (click to enlarge)

    Fifteen years back-test

    (click to enlarge)

    Summary

    The low risk dividend screen has given much better returns during the last year, the last five years and the last fifteen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmarks, was smaller in the five year and the fifteen year tests.

    One-year return of the screen was very high at 38.27%, while the return of the S&P 500 index during the same period was at 21.64%.

    The difference between the low risk dividend screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was an impressive 22.89%, while the average annual return of the S&P 500 index during the same period was only 2.53%. The maximum drawdown of the screen was at 51.39%, while that of the S&P 500 was at 57%.

    Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

    Disclosure: I am long HP. 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.

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Comments (2)
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  • aretailguy
    , contributor
    Comments (1364) | Send Message
     
    $HP is the best oil drilling rig company, period. It has been a great investment.
    29 Jan 2014, 04:50 PM Reply Like
  • larryl9
    , contributor
    Comments (146) | Send Message
     
    A mutual fund manager that I like to follow, Charlie Dreifus, just initiated a new holding in HP in the 4th Q of 2013.
    30 Jan 2014, 11:13 PM Reply Like
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