Tuesday, March 17, 2015

Recent Buy

Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.

Purchases for my FI Portfolio should slow down from here.  Well, I need them too although there's still enough capital for two smaller purchases.  I do have my eye on a few other potential purchase candidates but we'll see what kind of opportunities that Mr. Market decides to throw our way.  The great thing about having a fairly sizable portfolio already is that I can expect it to churn out over $1,300 per quarter in cold, hard cash.  I get to use that dividend stream for whatever needs I have, whether that's build up savings or future investments.

On March 10th I added shares to my position in National Oilwell Varco (NOV).  I purchased 30 shares for $50.8199 per share.  After commission my per share cost basis came to $51.08.  Based on the current quarterly dividend of $0.46 per share this lot will provide $55.20 in annual dividends and carry a YOC of 3.60%.

I originally purchased shares of NOV back in November 2014 when I bought 20 shares.  Since then the price per barrel of oil has been on almost a non-stop slide downwards.  The decline in oil and subsequent decline in drilling has hammered the share price of NOV.  My newest lot of shares was purchased for a 30.2% discount to my original purchase price and decreased my per share cost basis by 17.8%.  My YOC for my position in NOV increased from 2.51% to 3.06% with the addition of these shares.

Over the short term I wouldn't be surprised to see the price of oil and gas related companies continue to slide down.  There's currently a glut of oil within the United States due to unconventional drilling within many of the shale formations such as the Eagle Ford, Niobrara, Bakken...  With storage capacity reaching its limit rather quickly short term pain is probably still on the way.  However, the E&P side has met this head on with most companies reporting reduced CAPEX for 2015 of at least 15%.  Lower CAPEX means less wells drilled.  This has also led to a decrease in the number of rigs operating within the United States which is currently hurting NOV.

However, NOV has been in situations like this before only to come out stronger during the eventual rebound in prices.  The oil and gas industry is notoriously boom and bust, with busts happening every 5-10 years.  How long will the current bust last?  I have no idea but I'd guess we'll find out a lot more in about 6 months.  The majority of the shale plays have high initial production rates that then slow down between 3-6 months, some decline by as much as 85%.  With fewer wells being drilled this year and thus fewer wells being fracked the production levels so in theory start to decline which would lead to a high per barrel price of oil.  There's also the possibility that the US government would allow exports of crude oil which could help boost the price of oil.

It will be interesting to see what the dividend increase to be announced in May will be, assuming NOV decides to follow suit from the last few years.  I expect a small increase this year given the headwinds seen across the oil and gas sector, especially on the exploration side of the business.

Since I work on the E&P side of the industry I've been trying to limit my exposure to the O&G sector.  I'd hate to be in a situation where I lose my job due to a layoff and also lose some of my dividend income from that sector.  As you'll see in an upcoming post the energy sector currently provides 21% of my forward dividends which is probably a bit hefty since my income source is tied to the fortunes of the industry as well.  However, the prospect of averaging down my cost basis by a significant amount was just too tempting.  I figured there were two options that I could take in regards to my position in NOV and that was average down or close my position.  Given NOV's history and position as a leader in the industry I chose to average down in expectation of the eventual rebound in oil over the next 6-18 months.

NOV currently has $8.63 per share in cash on the books with a book value per share of $49.39.  Total debt to equity sits at a modest 15.2.  The trailing P/E ratio is currently at 8.33 with a forward P/E ratio of 14.38 signifying a large drop in earnings forecast for this year.  The payout ratio is at 28.0% on a TTM basis and based on expected EPS of $3.82 for FY 2015 the payout ratio with the current annual payment of $1.84 would be 48.2%.  The dividend use 41.3% of the FCF that NOV generated in FY 2014 although FCF should decline in FY 2015 until the price of oil and therefore drilling rebounds.

Using a Gordon Growth Model calculator with my purchase price of $51.08, annual dividend of $1.84 and a 10% discount rate NOV would need to grow the dividend at 6.18% per year to justify paying my entry price.  In good times I expect dividend increases to be much more bountiful but over the long term I'd expect to see something in the neighborhood of 7%.  Recalculating with the Gordon Growth Model gives a fair value price of $65.63.

My forward 12-month dividends are up to $5,500.73 excluding shares of my company's stock that I receive through the ESPP program at work.  Total taxable accounts', Loyal3 and FI Portfolio, forward dividends are at $5,531.61.

I've updated my Portfolio page to reflect this addition.

4 comments:

  1. I'm new to dividend investing but recently bought my first shares in NOV for many of the reasons you mention above, I'm considering adding more since the price has dropped even further. My big concern is my hefty exposure in oil and gas because everything is so cheap right now.

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  2. JC,
    I bought NOV around same time as you did, this is a great company with a high growth rate. I am not expecting a high growth rate in the future as the eps forecast is much lower YOY but the dividend seems covered for now. NOV and XOM are the two major energy companies I am eyeing right now that payout ratio seems covered tho expect lower dividend increase. Thanks for sharing!
    FFF

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  3. I'v been tempted to initiate a position in NOV since they have been one of the most hammered companies in the industry, yet maintain a very strong balance sheet, my exposure to the O&G sector via XOM, BBL, and XLE are what keep me away at the moment. Like you, I feel there is great opportunity presenting itself in this sector, especially for those of us who can wait 5 years to see a full recovery. Best of luck on your dividend endeavor!

    Cheers,
    Dividend Odyssey

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  4. Nice purchase JC. NOV continues to be a popular stock among dividend investors. I don't have a position, but looking to see if I need to initiate one. I have too much exposure to the oil sector through COP, CVX, BBL and BP. Not sure if I want to add one more, but will need to look at it.
    Thanks for sharing.

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