[UPDATE 12/01/2014: I actually wrote this article over the weekend. Today, it was published on SeekingAlpha. Check it out here; the comments are always good to read!]
Like many dividend growth investors, I love to follow Warren Buffett. I track his holdings meticulously, and use his portfolio as a starting point for a lot of my research. It’s been useful, since it has exposed me to a lot of companies I’ve never heard of before. There’s one in particular I’ve always seemed to gloss over, but with the sudden drop in oil prices, I’m taking a renewed interest in it. And conveniently enough, Dividend Mantra recently analyzed this very company. So if two of the investors I trust the most say that this company is worth owning … well, it’s time I look at it myself. Today, we’ll be looking at National Oilwell Varco (NOV).
Quick Background:
From Scottrade:
National Oilwell Varco, Inc. is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates through three segments. Its Rig Technology segment designs, manufactures, sells and services complete systems for the drilling, completion, and servicing of oil and gas wells. Its Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells and service drill pipe, tubing, casing, flowlines and other oilfield tubular goods. Its Distribution & Transmission segment provides maintenance, repair and operating supplies and spare parts to drill site and production locations worldwide.
The company in its present form was founded in 2005, but the predecessor companies can trace their roots all the way back to 1862. It is based in Houston, Texas, and employs about 64,000 people. NOV’s main competitors include Halliburton (HAL), Nabors Industries (NBR), and Schlumberger (SLB).
For more basic information, check out the company’s website and the 2013 annual report.
Fun fact: An investment of $10,000 in December 2000 in the predecessor companies would be worth $38,659.93 today, all dividends reinvested. This yields a annual rate of return of 10.2%. (Source: FAST Graphs)
Investment Criteria:
So now that we know a little bit about NOV, let’s subject it to our basic screening criteria:
- Pays a dividend: Yes
- Has 5+ years of dividend increases: Yes (6 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 12 or more: Yes (38.4)
- Has am EPS payout ratio of less than 70%: Yes (31.67%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; March, June, September, December)
- Has an S&P Quality Ranking of ‘A-‘ or better: No (B+)
- Has generally increasing earnings over the past 10+ years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes
Other Bonus Ratings:
- S&P Capital IQ: 3-star hold
- Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
- Thompson Reuters StockReport: 10 (optimized score of 7)
- Scale is 1-10, 10 being best, 1 being worst
- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 3 for safety; 2 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
Financial Overview:
NOV has a solid, though not astounding, dividend yield of 2.74%. The company pays out $0.46 per quarter, or $1.84 per share annually. The company is a bit new to paying dividends, having started to pay them in November 2009. NOV increased the dividend by a token amount from 2009 to 2013, going from $0.10 quarterly to $0.13 quarterly. Since then, it has been on a tear, more than tripling the dividend. I am not convinced that NOV is a true dividend growth stock, but the recent increases are reassuring. The company payout ratio is 31.67%, and the debt-to-equity ratio is only 0.15, both implying that dividend payments are not in immediate danger.
NOV is a net issuer of shares, going from 173 million in December 2004 to 428 million in December 2013. The company has split twice, two 2-for-1 stock splits in 1997 and 2007. The company also spun off its distribution business in May 2014. The new company is called NOW Inc (DNOW), and shareholders received one share for every four shares of NOV owned.
NOV’s current P/E ratio is 11.46. while Morningstar estimates that the one-year forward P/E ratio is 10.6. Due to the collapse in oil prices and energy stocks, I suspect this is more a result of falling stock price more than increased earnings. NOV’s gross margins and operating margins are better than the peer group’s, at 26.32% vs 23.77% and 16.70% vs 9.46% respectively. However, NOV’s net profit margin lags behind the group’s, at 11.50% vs 14.51%.
Morningstar rates NOV’s economic moat as “wide” and management as “exemplary”, considering it one of the most well-run and well-positioned companies in their coverage universe.
Over the next 5 years, NOV’s earnings are expected to grow 9.9% annually, with a total return of 12.3%. For comparison, HAL’s 5 year ETR is 35.2%, NBR’s is 77.6%, and SLB’s is 19.9%. Interestingly, this implies that NOV will underperform when compared to the peer group.
Risk Factors:
The first and most obvious risk is a continued decline in oil prices. Most of the majors have stated that preserving their dividend is the top priority. That immediately implies that capital expenditures spending will decline in order to preserve the dividend. Since NOV is reliant on producers buying their equipment to build rigs and drill wells, that means that new orders could decline and revenue could suffer. With the day rates for new rigs under pressure (as seen with Seadrill’s (SDRL) recently suspended dividend), this may already be coming to fruition. Another risk is a series of un-accretive acquisitions. NOV likes to grow through bolt-on acquisitions, and has done very well doing so. But of course, all it takes is one mis-timed or mis-priced acquisition, and the game could change drastically. Finally, NOV’s reputation is built on quality. If a piece of NOV’s equipment fails spectacularly and catastrophically, potential customers would be motivated to go elsewhere if possible.
As always, please don’t take my analysis as gospel. It’s always important to consider what others have to say. So here are three SeekingAlpha articles for you to peruse: here (bullish), here (neutral-bullish), and here (bullish). Of course, you should also look at Dividend Mantra’s analysis, linked above.
Final conclusion:
I consider NOV an attractive investment. It passes all my criteria, save one (the quality rating). I think NOV is excellently placed in the oil services sector. I remember reading that even though companies like SLB and HAL compete with NOV in areas like drill bits, they actually buy NOV’s equipment in other areas. Nothing screams “competitive advantage” like forcing your competitors to buy your equipment. Management seems extremely competent at their jobs as well. However, I am not thrilled with the pattern of dividend increases, and the fact that net profit margins lag behind the competitors’. The weakness in oil is also concerning. However, from what I’ve seen, I feel management will do right by the shareholders and the company in the long run. I consider NOV a buy, and recommend investors go long as free capital allows.
What do you think? Does NOV make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: I may go long NOV in the next week or so.
All data is accurate as of market close, 11/28/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.
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