UPDATE – SeaDrill (SDRL) Basic Financial Metrics.

UPDATE – SeaDrill (SDRL) Basic Financial Metrics including 4Q2010 results. 

This high dividend stock has some concerning long term debt loads; otherwise, all other basic financial metric look good.  The company operates 42 oil rigs some of which specialize in deep water drilling.  It has a modern fleet and the company thinks that they will benefit from oil company’s need for safe, reliable drilling in the wake of the BP oil spill.  Keep in mind that all mentions of the trailing 12 months or last 12 months are 1Q2010 through 4Q2010.  SeaDrill reported 4Q2010 and full year results today (February 25th, 2011).

I believe that SeaDrill would be an excellent buy at around $20.00 per share.  The stock price closed at $37.32 today.

Disclosure: I don’t own SeaDrill (SDRL).

Dividend history.  SeaDrill started paying dividends in 2008.  It has steadily increased its dividend for the last few quarters.

1Q2010 dividend =  $0.50 per share; 2Q2010 = $0.60; 3Q2010 = $0.61; and 4Q2010 = $0.65

1Q2011 dividend = $0.675 per share plus a extraordinary dividend of $0.20

Sales per share.  SeaDrill’s sales for trailing 12 months ended 4Q2010 were $4,066,900,000.  At the end of 4Q 2010 there were 443,308,487 shares outstanding.  By dividing $4,066,900,000 by 443,308,487, we get sales per share of $9.17.

Earnings per share. SeaDrill’s earnings per share of $2.64 for the trailing 12 months were calculated by dividing net income (income statement) by outstanding shares (balance sheet).  They earned $1,171,600,000 over the last 12 months.

Dividends per share. By dividing $989,900,000 in dividends paid in the last 12 months by 443,308,487 shares outstanding, we find that Safe Bulkers had dividends per share for the last 12 months of $2.23 per share.

Cash flow per share. The cash flow per share of $3.73 for the last 12 months was calculated by taking net income of $1,171,600,000 and adding back in the depreciation of $479,800,000, which has no impact on cash flow (income statement), and then dividing by the 443,308,487 shares outstanding (balance sheet).

Dividend yield. SeaDrill’s stock had a dividend yield on December 31st, 2010, of 6.57 percent.  The dividend yield is calculated by dividing the annual dividend per share of $2.23 per share at the close of 2010 by the stock price of $33.92.

Now let’s begin our analysis of the ability of SeaDrill to meet its maturing loan obligations and current cash flow needs by computing its liquidity and debt coverage ratios.

Quick ratio

The quick ratio is an important liquidity ratio that is computed by removing inventory from current assets and then dividing by the remainder by current liabilities.  This information can be found on SeaDrill’s balance sheet.  Since inventories are typically the least liquid of a company’s current assets and are likely to produce a loss if liquidated, it is prudent to look at the firm’s ability to cover short-term liabilities without relying on them.  The rule of thumb is that a company with a quick ratio over 1 or better indicates that it could cover all current liabilities with the liquid assets it has on hand, thereby reducing any need to cut its dividend.

SeaDrill’s quick ratio for the last 12 months is 1.15, more than the standard rule of thumb that you would like to see.  The higher the ratio, the better we like the company.  SeaDrill’s quick ratio climbed up to 1.15 from 0.82 at the end of 3Q2010.

Calculation: $2,883,000,000 current assets in 4Q2010 and no inventory divided by $2,514,300,000 in current liabilities in 4Q2010.

Debt coverage ratio

The short-term debt coverage ratio allows you to quickly see if the company’s short-term debt obligations can easily be paid by using the cash that is being generated from company operations.  This ratio is calculated by dividing income from operations ($4,040.8 M) by current liabilities ($2,514.3 M) or short-term debt (balance sheet).  This ratio should equal at least 2.0.

SeaDrill’s short-term debt coverage ratio equals 1.61 for the last 12 months.  This means that the company is generating less than twice the cash flow it needs from operations to pay off all of its short-term obligations.  Taken by itself, this ratio would indicate that the dividend is pretty tenuous and would also indicate that there is insufficient operating income to offset a slightly lower liquidity position if that were indicated by the company’s quick ratio.

Valuation ratios

There are two important ratios that can help you identify companies with good value characteristics.

Price-to-sales ratio. We rank companies with low price-to-sales ratios higher than those companies whose stock is pricey relative to the sales being generated.  You can calculate the ratio by dividing the stock price at the end of 4Q2010 ($33.92) by sales per share ($9.17).  SeaDrill’s price-to-sales ratio for the last twelve months is 3.70, which is not better than our 2.00 rule of thumb ratio that we use to indicate good value.

Price-to-earnings ratio (P/E). Also known as the price-to-earnings multiple, this ratio tells you how expensive the stock is from a price standpoint given earnings that the stock is generating.  Historically, stocks are a good value when the ratio or multiple is below 10, but we consider stocks that have a P/E of less than 12 – the lower the ratio the better.  You can calculate the ratio by dividing the stock’s price by the earnings per share being generated.  SeaDrill’s price-to-earnings ratio for the last 12 months was is 12.85 ($33.92 stock price divided by $2.64 per share).  It is about the higher today (close price on 2/25/2011 of $37.32 divided by $2.64 EPS).

Dividend ratios

Dividend coverage ratio. This ratio shows how secure the dividend is based on the cash flow being generated by the company.  Instead of applying the cash flow to analyze whether the company can meet its debt obligations, we analyze this ratio to assess how easily the company can keep making its dividend payments.  To calculate this ratio, you divide cash flow per share ($3.73) by dividend per share ($2.23).  The higher the dividend coverage from cash flow, the better we like it.

SeaDrill has a dividend coverage ratio of 167 percent.

Dividend payout ratio.
This ratio tells you how much profit the company is paying out to shareholders in dividends.  Once again, the higher the better, so long as the ratio does not exceed 100 percent.  Since a company can only pay dividends from current or retained earnings, it is a warning sign if a company is paying dividends that exceed current earnings.

SeaDrill’s dividend payout ratio is 84.5 percent and is calculated by dividing its dividend per share ($2.23) by earnings per share ($2.64).  We tend to look for companies that have payout ratios of at least 50 percent, which to us indicates that company is committed to rewarding shareholders through dividend payouts.  However, SeaDrill is a very new company (less than 5 years old), so that is a nice dividend payout for such a young company.

Growth ratios

One-year revenue growth ratio.  This ratio measures the one-year percentage change in revenue growth.  It is calculated by subtracting last year’s revenue ($3,325 million) from the current year’s revenue ($4,066.9 million) to find the difference ($741.9 million), and then dividing that difference ($741.9 million) by last year’s revenue ($3,325 million) to find the percentage change.  SeaDrill’s revenue growth rate for 2010 is 22.31 percent indicating that revenue has improved by slightly more than double our 10 percent rule of thumb.

 

One-year earnings growth ratio.  This ratio measures the one-year percentage change in earnings growth.  It is calculated by subtracting last year’s earnings ($1,353.1 million) from the current year’s earnings ($1,171.6 million) to find the difference ($181.5 million), and then dividing that difference ($181.5 million) by last year’s earnings ($1,353.1 million) to find the percentage change.  SeaDrill’s earnings growth rate was negative 13.41 percent in 2010, which is way below than our 10 percent rule of thumb for earnings growth rate.  SeaDrill paid off a significant amount of short term debt and that took earnings growth negative.

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Published in: on February 24, 2011 at 7:22 pm  Leave a Comment  

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