My High Dividend Stocks Blog
My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.
My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.
Seeking Alpha contributor Power Hedge published an article on May 31st titled “SeaDrill: Analyzing First Quarter Results, Dividend Increase.” He said that SeaDrill’s (SDRL) overall results were largely in line with expectations and overall continue to make the company look like a good investment. I disagree. I think that SeaDrill is a high dividend stock currently yielding 8.4%, but the dividend is not stable and the common stock has been speculatively priced since September 2010.
SeaDrill (SDRL)
Market price: $35.67
Shares: 466.55 million (from the latest quarterly report)
Dividend Record
Dividend: increase from $0.65 to $0.70 quarterly + $0.05 special dividend for the next four quarters
Dividend yield: 8.4% (includes special dividend)
Dividend payout ratio: 125% ($3.00 dividend/$2.39 adjusted 2010 EPS) The dividend is in jeopardy.
Earning power
Earnings adjusted for changes in capitalization due to stock issuance
EPS Net inc. Adj EPS
2006 $0.61 $214 M $0.46
2007 $1.20 $502 M $1.08
2008 ($0.41) ($164 M) ($0.35)
2009 $3.00 $1,261 M $2.70
2010 $2.73 $1,117 M $2.39
5 year average earnings = $1.26
Value territory below 12x five year average earnings = $15.12 (stock price was at $15 in July 2010)
Speculative territory above 20x five year average earnings = $25.20 This stock has been in speculative territory since September 2010.
Current market price is 28.3 times five year average earnings. This is SPECULATIVE.
Balance sheet strength: looks alright, but I haven’t delved deeply into it. It appears to be expanding rapidly. I’m concerned about what will happen when there is another financial crisis and the price of oil drops to the $40/barrel range again.
Book value per share: $11.45 SDRL last visited this price in July 2009.
Price to book value per share: 3.11
Current ratio: 1.15 (2.0 or greater is good)
Quick ratio: 0.87 (1.0 or greater is good)
Technicals: link to the 3 year chart with all my favorite indicators - http://stockcharts.com/h-sc/ui?s=SDRL&p=W&b=5&g=0&id=p71303834325
Disclosure: I don’t own SeaDrill.
Conclusion: I would consider buying this high dividend stock below $15.12 when the stock enters value territory. You might even get this deep water ocean driller at or below book value per share.
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
* * * * * * *
SeaDrill: Analyzing First Quarter Results, Dividend Increase.
SeaDrill Ltd. (SDRL) reported its first quarter results on Friday, May 27. The overall results were largely in line with expectations and overall continue to make the company look like a good investment.
First, a few highlights from SeaDrill’s first quarter earnings report:
SeaDrill’s overall results showed little change from the fourth quarter of 2010. Most of the differences were caused by various accounting rules. The company’s first quarter results explain the causes of the numbers.
SeaDrill’s net income for the quarter is abnormally high and it is unlikely that the company will be able to repeat those numbers throughout the year. SeaDrill reported a first quarter EPS of $1.84. Annualized, that works out to $7.36 for the full year 2011. The company had an EPS of $2.73 for the full year 2010. It becomes rather obvious that the company cannot be growing at the rate that the numbers seem to show. It makes more sense to look at the company’s cash flow when comparing quarterly results in this case.
SeaDrill had Q1 2011 operating cash flows of $509 million. This is an increase of $39.6 million (8.26%) over the fourth quarter of 2010. While not as impressive as net income growth, this is still a respectable growth rate. It is also much more realistic and repeatable. If SeaDrill maintains the same operating cash flow for the remaining quarters of the year, it would have a full year 2011 OCF of $2,036 million. This represents an increase of 56.5% over the 2010 OCF of $1,300.4 million. If the company does indeed succeed in reaching an OCF of $2,036 million, this would almost certainly result in an additional dividend increase in a later quarter of this year.
SeaDrill is now paying a forward dividend of $3.00 per share (including special dividend). This gives the stock a forward dividend yield of 8.44% at the May 27 closing price of $35.56 per share. At a dividend yield that high, the company does not have to grow very much to outperform. It does look poised to continue its growth trajectory, however.
SeaDrill secured new contracts for $1.2 billion in this quarter. To put that number into perspective, it is more than SeaDrill’s net income in 2010. It is also very close to the company’s operating cash flow from 2010. As I have mentioned in previous articles on SeaDrill, the company is currently having no problems getting new contracts for its rigs. Furthermore, the company is securing day rates on new contracts that are very close to the current outstanding rates. SeaDrill looks like it is well positioned to take advantage of the growth in offshore drilling.
SeaDrill has continued to expand its fleet throughout the first quarter as it has done for the past several quarters. On November 10, 2010, SeaDrill CEO Alf Thorkildsen briefly discussed the company’s growth potential in a press release:
Our commitment to establish SeaDrill as a leading drilling contractor through investing in new high specification offshore drilling units built by quality yards has been well received by our customers and investors. With the most modern drilling fleet in the world and a total contract backlog of $11.5 billion, we have created a solid platform for further growth and a continued high return to our shareholders.
As Mr. Thorkildsen noted, SeaDrill has a revenue backlog of approximately $11 billion. This is roughly equal to 10 quarters of revenues. The company has expanded since then, however. The company ordered three new rigs in the first quarter, which are under contract (two to Chevron and one to ConocoPhillips). During the quarter, the company had 42 offshore rigs in operation and three stacked units. One of these stacked units will be returning to operation in the second quarter which should have a favorable impact on operational cash flow. The company will be selling the West Juno rig in June and expects to realize an $18 million gain on the sale price.
SeaDrill will also retire the T8 tender rig and expects this to have no adverse impact on the income statement for the second quarter. SeaDrill is retiring the T8 rig because of its age; the company specifically states that the modern fleet is a major competitive advantage for the company (and I agree) and this is one of the oldest rigs owned by the company. West Juno was built in 2010, so the disposal of this rig will not contribute much to the modernization.
Simply put, SeaDrill Ltd. Has a very high dividend that on its own is likely to make the company outperform - particularly if the S&P 500 stays relatively flat over the next year. In addition to that, however, SeaDrill also has rather impressive growth characteristics that should enable the company to outperform. The stock continues to look cheap at these levels.
Zack's Investment Research expects full year EPS to be $2.90 in 2011 and $3.23 in 2012. I would not be surprised to see EPS come in a bit higher than Zack’s predicts due to the abnormally large EPS from this quarter. A 2011 EPS of $2.90 gives the company a forward P/E for the current year of 12.26. The $3.23 EPS estimate for 2012 gives the stock a P/E of 11 for 2012. It gives the stock a PEG ratio of 1.08. Assuming that Zack’s is correct, the fair value for the stock is $32.94. It's predicting $0.68 EPS for the current quarter (Q2). I think that it's right; the current quarter will probably not be as high as the first quarter was.
Net income can be a poor way to evaluate this company for the previously mentioned reasons, however. If SeaDrill can maintain the same OCF throughout the year that it did in the first quarter, then the P/OCF ratio is 7.73 ($4.60 of OCF per share). SeaDrill had negative FCF for the first quarter as is typical for this company (for more information, read my article on SeaDrill’s business model). Analysts are expecting earnings growth for the next year of 11.36%.
At the current prices, an investor buying today is getting the 8.44% dividend for free. The stock has been hovering between $32 and $36 for months -- it is near the top of the range now. If you are willing to be patient, an even better entry price may present itself. The stock is certainly not a bad value at its current price, though.
Disclosure: I am long SDRL.
Link to Power Hedge’s article: http://seekingalpha.com/article/272628-seadrill-analyzing-first-quarter-results-dividend-increase
There is no hard fast rule for price to book value ratios, but lower is definitely better. I like the ratio too be less than 2.0. Here is a list of many of the high dividend stocks mentioned on this blog with their most recent price, book value (BV)/share, Price/BV ratio, and dividend yield. The results might surprise you. Most of the book values per share are as of December 21st, 2010 unless otherwise noted.
Ticker Price BV/share P/BV Div. yield
=================================================
AGNC $28.58 $24.24 1.18 19.51%
SB $8.26 $3.86 2.14 6.79%
SDRL $34.42 $9.78 3.52 5.6%
TNH $108.96 $11.35 9.6 4.94%
EXC $39.97 $20.45 1.95 5.13%
FE $37.90 $28.02 1.35 5.99%
FRO $22.59 $9.57 2.36 1.62%
MCD $76.66 $13.55 5.66 3.27%
NGG $48.80 $12.87 (ttm) 3.79 4.28%
PM $65.90 $1.90 34.68 4.01%
PCL $42.13 $8.47 4.97 3.96%
TNK $10.15 $10.46 0.97 9.02%
VOD $28.85 $17.06 (ttm) 1.69 3.18%
WIN $12.41 $1.77 7.01 7.73%
T $30.27 $18.80 1.61 6.11%
Excelon (EXC), First Energy (FE), Teekay Tankers (TNK), and AT&T (T) warrant further examination for their high dividend yields and low price/book value ratios.
Philip Morris (PM) has an extremely high price/book value ratio which needs to be examined to make sure it’s not some weird artifact of how Google Finance and Morningstar display financial information.
Here is quick excerpt for Chapter 42 of Security Analysis 2nd edition on the practical significance of book value.
* * * * * * *
Practical Significance of Book Value. The book value of a common stock was originally the most important element in its financial exhibit. It was supposed to show “the value” of the shares in the same way as a merchant’s balance sheet shows him the value of his business. This idea has almost completely disappeared from the financial horizon. The value of a company’s assets as carried in its balance sheet has lost practically all its significance. This change arose from the fact, first, that the value of the fixed assets, as stated, frequently bore no relationship to the actual cost and, secondly, that in an even larger proportion of cases these values bore no relationship to the figure at which they would be sold or the figure which would be justified by the earnings. The practice of inflating the book value of the fixed property is giving way to the opposite artifice of cutting it down to nothing in order to avoid depreciation charges, but both have the same consequence of depriving the book-value figures of any real significance. It is a bit strange, like a quaint survival from the past, that the leading statistical services still maintain the old procedure of calculating the book value per share of common stock from many, perhaps most, balance sheets that they publish.
* * * * * * *
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
Morningstar initiated credit coverage of Seadrill (SDRL) today with an issuer rating of B. Morningstar is concerned that Seadrill will not be able to pay for existing debt interest, add additional debt interest from planned rig purchases, and maintain its high dividend. I share their concern.
I haven’t performed the methodical, deep analysis on Seadrill yet, but this information is not encouraging. I believe that Seadrill common stock is too expensive to be bought as an investment right now. Let me explain.
I didn’t compute Seadrill’s 2010 earnings in my last article that used Seadrill as one of the examples of investment and speculative stocks: http://bit.ly/SDRLexample . I only computed the EPS through 2009. I was attempting to compute Seadrill’s average earnings over 5 years, but Morningstar wouldn’t display the 2010 earnings. However, the quarterly filings were available and I have since computed the 2010 EPS.
The following table is computed by using the net income available for common shares divided by current quantity of common shares (380.86 M):
EPS (adjusted for changes in capitalization)
2006 $0.56
2007 $1.32
2008 ($0.43)
2009 $3.31
2010 $3.08
Seadrill’s five year average earnings (2006-2010) were $1.57 per share. I recommend that you don’t pay more than 20 times the 5 year average earnings for any common stock to make an investment. $1.57 x 20 = $31.40 per share is the upper limit for an investment basis. Seadrill’s current market price is $37.21; therefore, Seadrill would qualify a speculative purchase at today’s market price.
I would consider buying Seadrill for under twelve times the 5 year average earnings. $1.57 x 12 = $18.84 per share for a value investment basis. SDRL last traded for $18.84 back in September 2009.
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
New Credit Rating: Seadrill |
by Morningstar Credit Committee | 04 Apr 11 |
Morningstar is initiating credit coverage of Seadrill SDRL with an issuer rating of B. Seadrill is a leading offshore drilling contractor for the oil and gas industry. Our rating reflects the firm's aggressive business strategy of fully debt financing its rig construction program, stretched credit metrics, and aggressive dividend policy. At the end of 2010, Seadrill had about $9.2 billion in total debt versus about $1.4 billion in available cash and marketable securities and $1 billion in investments. The debt is broken into $5.2 billion in credit facilities and debt that is secured by Seadrill's rigs, $1.8 billion in Ship Finance sales and leaseback transactions, and $2.2 billion in bonds, convertible bonds, and credit facilities supported by restricted cash. In early 2011, Seadrill bought two deep-water rigs for $1.2 billion, financed using bank debt. We estimate that at the end of 2011, Seadrill's EBITDA/interest ratio will be around 5.2 times, its debt/capital will be around 0.73, and its debt/EBITDA will be 4.7 times. Despite these stretched credit metrics, Seadrill currently pays out more than $1.0 billion in dividends annually. In addition, Seadrill faces near-constant financing challenges. The majority of Seadrill's debt matures in five to seven years, and we estimate it has $5.2 billion coming due in the next three years. We do not think Seadrill's cash from operations will be enough for its needs, given its already announced rig construction spending of $4.6 billion. We estimate Seadrill will generate between $1.9 billion and $2.3 billion in operating cash flow annually over the next three years, or about $5.7 billion in the aggregate. Therefore, Seadrill needs to fill a financing gap of about $4.1 billion. From a risk perspective, Seadrill's financial leverage has amplified its exposure to the inherent cyclicality of the contract drilling industry. Market day rates are volatile and outside drillers' control, which contributes to significant swings in profitability on a short-term basis. In addition, explosions, hurricanes, and government expropriation introduce tail risk to the firm's operations. |
Link to original article: http://torontostar.morningstar.ca/globalhome/industry/news.asp?articleid=375748
The second edition of Security Analysis provided several examples of speculative and investment common stocks. The examples are so illustrative, but they are from 1940. I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .
I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T. Let me tell you why I chose these stocks. I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.
Goldcorp (GG) I used to own Goldcorp when it was priced in the high teens and twenties. I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX. I currently own FSAGX in my 401(k) account and I’m considering selling it. You will see why momentarily.
Proctor & Gamble (PG) This stock is often written about in dividend aristocrat articles. It pays a modest dividend and grows its dividend annually like clockwork. Many people watch this dividend stock.
American Capital Agency Corp. (AGNC) I’ve included it because I have written many articles on this ultra-high dividend stock. I don’t like it because its earnings can’t support the current dividend payout. It balance sheet is horrible like all financial institutions (e.g. banks).
Seadrill Limited (SDRL) This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.
Safe Bulkers (SB) I love this high dividend stock with earning power and a strong balance sheet. You will see why in moments.
AT&T (T) I pays almost a 6% dividend and it is and dividend aristocrat. Many eyes are on this one so I want to know at what price is it a value buy.
* * * * * * *
Examples of Speculative and Investment Common Stocks. Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating. For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell. According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them. Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.
* * * * * * *
There were three groups of examples in Security Analysis. Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization). The companies in group A were: General Electric, Coca Cola, and Johns-Manville. Proctor & Gamble and AT&T sort of fit into the Group A category.
Group B were common stocks speculative in December 1938 because of their irregular record. Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube. American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B. Goldcorp also has a poor divided and a high price. AGNC is irregular with a high price.
Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint. They included Adams-Millis, American Safety Razor, and J.J. Newberry. I have never heard of any of these stocks. The only stock in my example that makes this cut is Safe Bulkers. This is why Safe Bulkers is in my best dividend stocks category.
* * * * * * *
Comments on the Various Groups. The companies listed in Group A are representative of the so-called “first-grade” or “blue-chip” industrials, which were particularly favored in the great speculation of 1928-1929 and in the markets of ensuing years. They are characterized by a strong financial position, by presumably excellent prospects and in most cases by relatively stable or growing earnings in the past. The market price of the shares; however, was higher than would be justified by their average earnings. In fact the profits of the best year in the 1929-1938 decade were less than 8% of the December 1938 market price. It is also characteristic of such issues that they sell for enormous premiums above the actual capital invested.
The companies analyzed in Group B are obviously speculative, because of great instability of their earning records. They show varying relationships of market price to average earnings, maximum earnings, and asset values.
The common stocks shown in Group C are examples of those which meet specific and quantitative tests of investment quality. These tests include the following:
1. The earnings have been reasonably stable, allowing for the tremendous fluctuations in business conditions during the ten-year period.
2. The average earnings bear a satisfactory ratio to market price.
3. The financial set-up is sufficiently conservative, and the working-capital position is strong.
Although we do not suggest that common stock bought for investment be required to show asset values equal to the price paid, it is non the less characteristic of Group C that, as a whole, they will not sell for a huge premium above the companies’ actual resources.
Common-stock investment, as we envisage it, will confine itself to issues making exhibits of the kind illustrated by Group C. But the actual purchase of any such issue must require also that the purchaser be satisfied in his own mind that the prospects of the enterprise are at least reasonably favorable.
* * * * * * *
Safe Bulkers is a dry bulk shipper with around sixteen ships rented out to various customers. The dry bulk market suffering due to the global recession and a glut of ships built during the boom, but Safe Bulkers is well positioned to prosper in even that harsh environment. Its prospects and the industries are good.
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
The second edition of Security Analysis provided several examples of speculative and investment common stocks. The examples are so illustrative, but they are from 1940. I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .
I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T. Let me tell you why I chose these stocks. I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.
Goldcorp (GG) I used to own Goldcorp when it was priced in the high teens and twenties. I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX. I currently own FSAGX in my 401(k) account and I’m considering selling it. You will see why momentarily.
Proctor & Gamble (PG) This stock is often written about in dividend aristocrat articles. It pays a modest dividend and grows its dividend annually like clockwork. Many people watch this dividend stock.
American Capital Agency Corp. (AGNC) I’ve included it because I have written many articles on this ultra-high dividend stock. I don’t like it because its earnings can’t support the current dividend payout. It balance sheet is horrible like all financial institutions (e.g. banks).
Seadrill Limited (SDRL) This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.
Safe Bulkers (SB) I love this high dividend stock with earning power and a strong balance sheet. You will see why in moments.
AT&T (T) I pays almost a 6% dividend and it is and dividend aristocrat. Many eyes are on this one so I want to know at what price is it a value buy.
* * * * * * *
Examples of Speculative and Investment Common Stocks. Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating. For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell. According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them. Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.
* * * * * * *
There were three groups of examples in Security Analysis. Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization). The companies in group A were: General Electric, Coca Cola, and Johns-Manville. Proctor & Gamble and AT&T sort of fit into the Group A category.
Group B were common stocks speculative in December 1938 because of their irregular record. Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube. American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B. Goldcorp also has a poor divided and a high price. AGNC is irregular with a high price.
Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint. They included Adams-Millis, American Safety Razor, and J.J. Newberry. I have never heard of any of these stocks. The only stock in my example that makes this cut is Safe Bulkers. This is why Safe Bulkers is in my best dividend stocks category.
Item | Goldcorp (GG) | Proctor & Gamble (PG) | American Capital Agency Corp. (AGNC) | Seadrill Limited (SDRL) | Safe Bulkers (SB) | AT&T (T) | ||||
Dividend Yield | 0.84% | 3.14% | 19.50% | 7.46% | 6.85% | 5.77% | ||||
Earnings per share | ||||||||||
2001 | ? | ? | - | - | - | ? | ||||
2002 | ? | ? | - | - | - | ? | ||||
2003 | ? | ? | - | - | - | ? | ||||
2004 | ? | ? | - | - | - | ? | ||||
2005 | $0.35 | ? | - | - | ? | ? | ||||
2006 | $0.51 | $3.05* | - | $0.56 | $1.48 | $1.24 | ||||
2007 | $0.58 | $3.64* | - | $1.32 | $3.18 | $2.02 | ||||
2008 | $1.85 | $4.25* | $0.28 | ($0.43) | $1.81 | $2.18 | ||||
2009 | $0.30 | $4.73* | $0.94 | $3.31 | $2.51 | $2.05 | ||||
2010 | $1.64 | $4.47* | $2.30 | ? | $1.66 | $3.36 | ||||
10-yr. average | ? | ? | - | - | - | ? | ||||
5-yr. average (2006-2010) | $0.98 | $4.03 | 3-yr. average $1.17 | 4-yr. average $1.19 | $2.13 | $2.17 | ||||
12 times 5Y average earnings | $11.71 | $48.36 | $14.08 | $14.28 | $25.56 | $26.04 | ||||
20 times 5Y average earnings | $19.60 | $80.60 | ||||||||
In this blog post I’m going discuss some aspects of the mechanical tests your should apply to common stocks you are considering to buy and at what price.
On March 16th, 2011 I wrote about not buying a common stock generally above 20 times average earnings in this post: http://bit.ly/MaxAvgPE . I have to admit that I was a little lazy. Like most people I used 20 times the current annual earnings to complete the table in that blog post because it the info was readily available, but a five or ten year average is more through and enlightening. It takes a while to find all the earnings data for the past ten years and then to make adjustments for changes in capitalization, warrants, and convertible preferred stocks.
The excerpt below from Benjamin Graham’s Security Analysis 2nd edition is a devastating indictment on how speculative so-called investors are both in 1940 and today.
Over the next couple of days I’m going to calculate many values for testing common stocks for investment basis that I’ve already written about on this blog. The goal is separate the speculative stocks from the investment stocks. The list includes: GoldCorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), SeaDrill (SDRL), Safe Bulkers (SB), and AT&T (T).
* * * * * * *
Higher Prices May Prevail for Speculative Commitments. The intent of this distinction must be clearly understood. We do not imply that it is a mistake to pay more than 20 times average earnings for any common stock. We do suggest that such a price would be speculative. The purchase may easily turn out to be highly profitable, but in that case it will have proved a wise or fortunate speculation. It is proper to remark, moreover, that very few people are consistently wise or fortunate in their speculative operations. Hence we may submit, as a corollary of no small practical importance, that people who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run. This is the more probable because, in the absence of such a mechanical check, they are prone to succumb recurrently to the lure of bull markets, which always find some specious argument to justify paying extravagant prices for common stocks.
Other Requisites for Common Stocks of Investment Grade and a Corollary Therefrom. It should be pointed out that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum. This suggests that about 12 or 12.5 times earnings may be suitable for the typical case of a company with neutral prospects. We must emphasize also that a reasonable ratio of market price to average earnings is not the only requisite for a common-stock investment. It is a necessary but not sufficient condition. The company must be satisfactory also in its financial set-up and management, and not unsatisfactory in its prospects.
From this principle there follows another important corollary, viz.: An attractive common-stock investment is an attractive speculation. This is true because, if a common stock can meet the demand of a conservative investor that he get full value for his money plus not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.
* * * * * * * *
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
The S&P 500 index has had quite a run since its March 2009 bottom. It hit bottom at 666 points on March 9th, 2009 and has powered 94.5% higher to 1,249 today.
I think it’s time to reexamine the S&P 500 PE ratio. Are we closer to a market top or a market bottom? The price to earnings ratio for the S&P 500 is currently 18 (http://www.decisionpoint.com/tac/Swenlin.html ). It has been around or above 20 since 2003. I don’t think that the market is anywhere near the value level.
Time for a little price to earnings ratio history lesson. The following excerpt comes from the book Security Analysis (2nd Edition) pg. 536 and it is enlightening 71 years later.
* * * * * * *
In previous chapters various references have been made to Wall Street’s ideas on the relation of earnings to values. A given common stock is generally considered to be worth a certain number of times its current earnings. This number of times, or multiplier, depends partly on the prevailing psychology and partly on the nature and record of the enterprise. Prior to the 1927-1929 bull market ten times earnings was the accepted standard of measurement. More accurately speaking, it was the common point of departure for valuing common stocks, so that an issue would have to be considered exceptionally desirable to justify a higher ratio, and conversely.
Beginning about 1927 the ten-times-earnings standard was superseded by a rather confusing set of new yardsticks. On the one hand, there was a tendency to value common stocks in general more liberally than before. This was summarized in a famous dictum of a financial leader implying that good stocks were worth fifteen times their earnings.1 There was also the tendency to make more sweeping distinctions in the valuations of different kinds of common stocks. Companies in especially favored groups, e.g., public utilities and chain stores, in 1928-1929, sold at a very high multiple of current earnings, say, twenty-five to forty times. This was true also of the “blue chip” issues, which comprised leading units in miscellaneous fields. As pointed out before, these generous valuations were based upon the assumed continuance of the upward trend shown over a longer or shorter period in the past. Subsequent to 1932 there developed a tendency for prices to rule higher in relation to earnings because of the sharp drop in long-term interest rates.
* * * * * * *
This chart confirms that there has been a change in investor valuation of common stocks over the years. The bottoms of S&P 500 has been rising. Too bad the chart cuts off in 2003.
How low did the S&P 500 P/E ratio fall to during the Panic of 2008-2009?
It didn’t fall during the panic. On the contrary, it skyrocketed because earnings were falling faster than stock prices. It has settled in the 18-20 PE range since the end of 2009. Dividend yields tend to be highest at market bottoms. The last time the S&P 500 yielded over 6% was in 1982. We are closer to the top of the market than the bottom. If you are in the market, then you should make plans to get out before the next financial crisis.
Current price to earnings ratios of stock mentioned often on this blog:
American Capital Agency Corp. (AGNC) – 4.00
SafeBulkers Inc. (SB) – 4.98
SeaDrill (SDRL) – 13.70
Terra Nitrogen (TNH) – 13.51
AGNC and SafeBulkers are high dividend stocks in the value zone, but only SafeBulkers has earning power and a strong balance sheet.
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
Seeking Alpha contributor Power Hedge is bullish on SeaDrill (SDRL). He cites reasons why in this article:
http://seekingalpha.com/article/255853-seadrill-why-i-remain-bullish
I agree with his sentiments, but I would wait for a stock market correction or crash to buy it dirt cheap at around $20.00 share. That 7% yield would jack up to double digits.
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!
Deepwater oil driller SeaDrill (SDRL) has the least exposure to the US government’s drilling permit delays amongst ultra-deepwater drillers. They only have one rig operating in the Gulf of Mexico (West Sirius pictured).
http://www.reuters.com/article/2011/03/01/energy-drillers-gulfofmexico-idUSN0113598720110301
Rig type: Semi-submersible
Name: West Sirius
Generation/type: 6th-BE
Built: 2008
Water depth (feet): 10,000
Drilling depth (feet): 35,000
Location: Gulf of Mexico
Client: BP
Current contract: Start – July 2008; Expire – July 2014; Dayrate - $474,000
Previous contract: none
Source: SeaDrill Fleet status report 4Q2010 (http://www.seadrill.com/investor_relations/fleet_update_report )
SeaDrill is paid by BP $474,000 per day regardless if they are allowed to drill or not. However, oil companies will eventually terminate their contracts with drilling providers (like SeaDrill) if the US government doesn’t issue permits in a manner timely enough to profitably drill for oil. The good news is that if the US government is slow to issue permits to drill, then SeaDrill is exposed the least amongst the companies mentioned in the article link above. Transocean (RIG) has the most exposure to the Gulf of Mexico deepwater permit delays.
The West Sirius should bring in $173 million dollars in revenue per year for SeaDrill per its contract with BP. I couldn’t find the cost to build the West Sirius in a simple Google search.
Most of SeaDrill’s rigs are in Southeast Asia waters.
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
Be seeing you!