Recently, I have been looking for a way to diversify my portfolio with a stock that has both a high-yield dividend, and a 20%-25% PPS growth possibilities. I recently came across Ensco Plc. (NYSE: ESV). Ensco owns and operates offshore contract drilling services and is the world's second-largest offshore driller. Although the oil and gas industry hasn't performed well in 2014, I believe this is a great opportunity to enter into a position.
In 2014, most oil rig companies have gotten crushed; both in their YTD returns, along with lower adjusted future production and earnings. The recent dip in oil prices will also have a large effect on companies' profits for the quarter and fiscal year. Last month, Ensco released their 2014 Q3 report, and Chief Executive Officer and President Carl Trowell instilled faith and confidence to investors that the future looks promising for Ensco. In the third quarter, revenues grew 9% to $1.261 billion, along with a rise in earnings per diluted share, which was $1.83, up from $1.62 in the third quarter of 2013.
One of the largest problems Ensco faces moving forward is the age of their oil fleet. Currently 33 rigs were built in 1985 or prior, and are closing in on their useful life and will become even more obsolete as time goes on. As newer drillships and rigs are built, demand and rates for the older assets will drop off significantly. Year to date, Ensco has sold seven Jackup rigs, and since the beginning of 2010, have sold a total of 18; they also currently have 5 rigs currently available for sale.
During the Q3 conference call, Trowell stated: "…low oil prices will lead to challenging conditions in 2015, and probably into 2016." As everyone knows, crude oil prices have plummeted and are near a four-year low, trading at $70.15/barrel. I personally do not forecast oil prices staying this low for much longer. I wouldn't be surprised to see $95/barrel by March 1st. Too many countries need higher oil prices to make their economies flourish for oil prices to remain at these low prices.
Ensco will pay out a dividend of $0.75 per share, with an ex-dividend date of Thursday, December 4th. At the current price of $33.80, a $0.75 quarterly dividend comes out to an annualized dividend yield of 8.88%. Last Thursday, SeaDrill (NYSE:SDRL), a main competitor, announced they were suspending their dividend, causing the whole industry to fall. Some might suspect other companies might follow suit, however, I don't foresee that happening. Ensco has a payout ratio of 51.1% and currently sits on $1.22 billion in total cash, which is equivalent to $5.20 cash per share. Their dividend growth has increased in the last few years, so I don't expect that trend to continue each year going forward. However, if oil prices result in lower future earnings, can Ensco continue to pay out $3.00 per share, or would they have to lower their annual dividend?
The price hasn't been this cheap since 2009, and was trading near $60 this time last year. With the 15% drop within the past week, it is a great buying opportunity to add a high-yielding dividend stock to your portfolio.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.