Friday, July 24, 2015

National Oilwell Varco (NOV) Dividend Stock Analysis

Dividend Growth Stock Blog
Hello,




I usually screen my companies using David Fish’s CCC list. For this month, I used the following criteria:
  • Yield over Avg Yield > 1.10
  • Payout Ratio < 0.8
  • Chowder > 10
  • PE over Median PE < 1.0


Basically, the screen looks out for companies with lower than average P/E and higher than average yield. I also wanted a high Chowder to make sure that the company has enough dividend growth. Lastly, I further filtered out companies based on excellent (A) credit ratings.
You can review my July screen here:




Then, I fully research these companies and invest accordingly.


If you follow my blog, I recently mentioned that NOV is starting to look very attractive.


National Oilwell Varco (NOV)  Dividend Stock Analysis


National Oilwell Varco (NOV) is an international oilfield services company that provides the hardware components. NOV’s customers are Exxon Mobil (XOM) and CONOCOPHILLIPS (COP) as well as large drilling companies such as Transocean (RIG).


Criteria List


NOV 7/2015
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
6 Years
ROE/Op Margin
Stable
Yes
Stable
Long term Avg Growth
Stable
Yes
Stable
FCF over Dividends
Yes
Yes
FCF covers Dividends
M* Moat
Wide Moat
No
Narrow
M* & S&P
Credit Rating
> BBB+
Yes
A+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes
Cash to Debt 0.71
Interest Coverage 34.41
Debt to Equity 22.2
M* & S&P Stars
> 3 Stars for both
Yes
M* 5 Stars
S&P CapIQ 3 Stars
Payout Ratio
<60%
Yes
35.00%
Dividend Growth
& Yield
Dividend Yield
>3%
Yes
4.10%
Dividend Growth
>5%
Yes
60.10%
Chowder
>12%
Yes
64.20%
Valuation
Yield/Avg Yield
>1.1
Yes
3.15
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 63.68
Low Point 39
P/E
Below Mid Point
Yes
Median 13.28 Current 8.22
DRRM
~10%
Yes
Assuming 5.5% growth; projected return=11.33%
M* Estimate
<M* est
Yes
M* 66
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 58


Note: data from M*, Yahoo, Gurufocus and CCC


Quality analysis


Years of Dividend raises


NOV has 6 years of dividend raises. Normally, I prefer a company with dividend growth > 10 years. I am okay with a lower number for companies meeting most of the criteria checklist.


As you can see NOV does not have a long history of dividend growth.


Stability of key metrics


These stability of the ratios provide an indication of moat & management strength. I am looking for overall stability (or even better - growth). If the ratios decline year over year, then this is an indication of moat reduction and poor management. I also compare these ratios with other companies within the same sectors.


The ROE is around 14% on average  which puts it at above 71% of Oil & Energy companies.


However, a ROE in the teens indicates a narrow moat. However, the stability of the metrics is a good sign, meaning that the company is relatively stable.


Free cash flow over dividends  


I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends.


As you can see, the FCF covered the dividends for most parts with an exception of a couple of years.


This data with the fact that this dividend history is sparse could be an area if concern.


Average growth


Here, I look for the stability of growth indicators over ten years using the EPS and Revenue.
So, in general, the EPS and revenue are growing from the last 10 years.


The 10 years average looks reasonable.




However, there is a definite dip between 2010 and 2012.
This is somewhat expected since this is a very cyclical business.


EPS Analysis

It is good to review the actual earnings and number of outstanding shares to see exactly how the EPS grows.


As you can see, the EPS is mostly correlated with the earnings. Overall, there is a slight rise in shares but it is not really impacting the EPS metric.


EPS and Price


Eventually, a lack of earnings over a long period of time will drive a stock price down and the company potentially out of business. On the other hand, a rising EPS will have a positive impact on price.


The correlation is not too tight in the case of NOV. In particular, the large price dips occurred when the EPS dropped slightly.


From a dividends stock perspective, a growing EPS is important for continued dividends growth.


Overall, the EPS has been growing since 2006.


S&P Capital IQ 3-Yr. Projected EPS CAGR(%) is around -12% which is not a good sign for short term price fluctuations.


3Y Growth from GuruFocus
Revenue Growth (3Y)(%)
13
EPS Growth (3Y)(%)
6.6


Overall, a mixed projected EPS growth from analysts.


M* Moat
I simply use the moat indicator from M* to validate my findings.  M* indicates that NOV has a narrow moat.  Another indicator of moat, in addition to margins and ROE is the ROIC.
With the ROIC in the teens, NOV's moat is narrow. Morningstar's explanation is that while NOV is the top vendor for nuts and bolts and other equipment needed for drilling, their balance sheet had expanded faster than the operating cash flow, which was caused by its many acquisitions over the last few years. This imbalance lowered the ROIC.


Credit rating
Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective.


NOV's credit rating from M* is A+ which is a good indication of the security of the company.


Debt


I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5). Sometimes, a little good debt is good for a business. But too much debt can be a burden.


NOV's Cash to Debt 0.71 with Interest Coverage at around 34.41 which means the debt can be covered. (The threshold is 5) The TTM Debt to Equity is around 22.2 which is below my 50% threshold.


Over the last 10 years, the debt to equity ratio is well controlled.




M* and S&P capital IQ rating


I am looking for 3 stars and above from either. A four/five star is a bonus.  
M* gives NOV 5 Stars and S&P CapIQ gives 3 Stars
NOV combined stars is 8 - which means it is a good indication to buy.


Dividend Yield and growth
  • Dividend yield is 4.1% which is above my threshold of 3%.
  • 5Y CAGR dividend growth is above 60%  which is much higher my threshold of 5%.
  • Chowder is around 64% which is below my 12% threshold.
Obviously, the dividend growth rate is not sustainable. For companies early in the dividends cycles, these numbers are not unexpected. It would be interesting to see NOV's dividend growth after 10-15 years dividend history.


Payout Ratio
The TTM payout ratio for NOV for the recent quarter is around 35% which is below the threshold of 60%.  For the last five years, NOV has a payout ratio under 20%.


Value analysis


Average yield


The current yield per average yield for 5 years ratio is >3.0. I use this as a quick indicator for valuation.This basically means that NOV's current yield is almost 200% over the average yield - which means that it is extremely under value.


Dividend Yield Theory Mid Point


Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.  


I estimate the high and low yields to be:


High
4.50%
Low
2.00%


Which produces the high and low boundaries.




This gives the following high, mid and low price ranges.


High Price:
89.03
Mid Price:
64.30
Low Price:
39.57


NOV's current price is in the low 40s which means it is very near the Low price range.


P/E Analysis


I can also estimate the fair value using the high and low earnings multiples based on the article and spreadsheet: http://div4son.blogspot.com/2015/06/using-pe-for-dividend-stock-valuation.html


I estimate the High and Low Earnings multiple to be:


High P/E
17.10
Mid P/E
13.00
Low P/E
8.90


Which gives an estimation of the price lines:
High Price
89.43
Mid Price
67.99
Low Price
46.55


The median and current P/Es are:


P/E 5 Yr Median
13.28


Current P/E
8.30


With the current price in the low 40s, the P/E analysis is indicating that NOV is trading at the low price point.


Dividend Drill Return Model
Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative growth rate of 5.5. (Guru puts a EPS growth of 6% - but S&P Capital IQ has a negative growth).


DDRM

Dividend Rate ($)
1.78
Divided by: share price
43.43
Current yield (%)
4.10
Core Growth Estimate (%)
5.50
Divided by: ROE (%)
10.56
Multiplied by: EPS ($)
5.23
Cost of Growth (%)
2.72
Earnings per Share ($)
5.23
Minus: Dividend
1.78
Minus: Cost of Growth
2.72
Funding Gap ($)
0.73
Divided by: Share Price ($)
43.43
Share Change (%)
1.67
Core Growth (%)
5.50
Plus: Share Change (%)
1.67
Total Dividend Growth (%)
7.17
Plus: Dividend Yield (%)
4.10
Projected Total Return (%)
11.27


NOV's projected total return is >11% which is around my 10% threshold.


Rearranging the numbers based on the dividend growth & 5.5% growth:


Dividend Rate ($)
1.78
Required Return (%)
10.00
Growth (%)
7.17
Price
62.93


Dividend Rate ($)
1.78
Required Return (%)
10.00
Growth (%)
5.50
Price
39.57


The average is around 48.


M* and S&P valuations


Morningstar NOV a target of $66. S&P capIQ gives a target of $58 Therefore, with a current price around low 40s, NOV is undervalued.


Note: The whole point of all the valuation is to get a ballpark estimation. I estimate a fair value of in the ballpark of $50.


Risks
  • The dividend history is not good. Moreover, management has skipped the regular dividend raise earlier this year.
  • The moat is narrow.
  • Governments are more cautious with offshore drilling after The BP oil spill incident.
  • Short term volatility with the energy sector.


Conclusion


The only issues I see with NOV are the short dividend growth history and narrow moat, and of course, the short-term noise from the energy market.
The first point can be a concern. However, I think we should be fine based on the low payout ratio, and the current high FCF.
The last point is just noise in my opinion. However, this, coupled with how the price is impacted with a negative EPS growth, can be troublesome.


However, my investment outlook is decades,so I think I am okay. The company has strong fundamentals in terms of low debt and long term growth. Bear in mind also that the business is very cyclical.


From a price perspective, I believe the current price (in the low 40s) is very attractive.


That's it for all. What do you think of NOV?


D4S

2 comments:

  1. Great analysis D4S...thanks for your contribution to the DGI community. To help share it with more readers, I've added this to our Collection of Stock Analyses. We will be doing an update post soon and will be sure to mention your analysis of NOV when we do.

    Take care. Hope you have a great weekend! AFFJ

    ReplyDelete
    Replies
    1. AFFJ,
      As always, thanks for the support! Your Collection of Stock Analyses is one of the best DGI resources out there. Thanks!
      D4S

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