Offshore Oilfield Services

Wunderlich Securities had the following to say in their most recent release about the Offshore Oilfield Services sector as a whole.

February once again saw a continuation of the underperformance for the offshore oilfield services group which began in late 2013. The weakness remained broad with all but two companies in our coverage universe underperforming the OSX. Most companies in the space reported 4Q13 results that were ahead of or in-line with consensus estimates. However, commentary from company management during 4Q13 conference calls was consistent with the belief that both the floating market for offshore drilling rigs and the offshore support vessel markets look to be facing a period of 12-18 months of oversupply. We continue to believe the negative sentiment that investors were focused on during 2H13 is likely to continue through at least the first half of 2014.

There are two companies in this space which I already own, Seadrill (SDRL) and Vantage Drilling Company (VTG). Vantage (VTG) is down 6.7% year to date, and Seadrill (SDRL) is down 16.26% for the same period. Wunderlich maintains a buy on both stocks, with a price target of $51.00 for Seadrill (SDRL) verses about a $34.00 current price. They have a $3.00 price target for Vantage (VTG) verses about $1.70 current price. Here are a few reasons I will be holding and adding to both of these stakes.

Vantage Drilling Company (VTG) From Wunderlich’s latest report on the company:

Vantage has 7 rigs working (3 drillships, 4 jack-ups) that, in combination with the company's management business, gives it the greatest flexibility and cash flow generating ability in the company's history. With the majority of Vantage's capacity for 2014 booked, the company can begin to focus on delevering. We believe the company should be able to pay down ~$200 million in 2014 and beyond without impacting the company's newbuild program. We believe it would not be unreasonable for the company to bring its debt-to-cap ratio down about 1000 bps from ~85% to 75% by the end of 2015. On the jack-up side, Vantage sees modern high specification units fully utilized and in very high demand. The current bids for modern jackups in Asia are generally in the $165-$175k/d range, and it's about $10-$15k more than that in West Africa.

Seadrill (SDRL) Since its September highs in 2013 Seadrill (SDRL) is down over 26%. One thing Seadrill has to offer, that others in the sector do not currently, is a very high dividend. Since the stock has trailed down 26%, that dividend is now just over 11%. For many stocks this would be looked at as a fairly risky dividend, with the expectation that it could be cut. Seadrill on the other hand has stated time and time again that they have no financial constraints preventing them from maintaining this dividend level. Furthermore, they have a track record of continuing to raise the dividend. In their most recent quarterly release it sounds as though they will look to use their available cash flow to fund share buybacks and other capital projects. Wunderlich had the following to say:

In the past Seadrill has been aggressive in making increases to its quarterly dividend and did so again in 4Q13 raising the dividend to $0.98. Seadrill noted that it sees limited value in increasing the dividend past its current yield and would likely focus capital allocation toward share repurchases, acquisitions, and reducing debt. Seadrill has established a dividend capacity fund that will preserve ~20% of the net proceeds from any future MLP dropdowns. We believe that Seadrill's current dividend is sustainable.

Looking forward at 2015, the company has 72% of its 2015 capacity booked. It was in the processes of finalizing two more contract for 2014 capacity that would result in 98% of 2014 capacity being booked. The current P/E for the stock is under 7, that combined with an 11% dividend makes this stock too hard to pass up on. In my case I have added to an existing stake in the company.

Are dividend paying tech stocks undervalued?

Big, cash-rich technology companies are drawing intense scrutiny these days from frustrated shareholders and activist investors, but they also have found some new fans.

Take famed Oakmark Fund manager Bill Nygren. He thinks the market is undervaluing technology stocks—or, at least, looking at some of the bigger names through the wrong lens. They look a lot like the consumer product companies of the 1980s to Nygren, featuring moderate top-line growth and relatively inexpensive valuations. Intel, for example, is selling only at 11 times next year's earnings, Nygren noted. The technology industry is returning lots of capital to investors, too, and not just in the form of stock buybacks. "It's a good place to look for dividends," he said.

Intel (INTC) is currently paying 3.62%, Cisco (CSCO) is paying 3.5%, and Microsoft (MSFT) is paying 2.96%

While these yields are not overwhelmingly high, compared to certain telecoms (AT&T (T) 5.70% and Verizon (VZ) 4.58%), the top tech companies are keeping pace with the broader utilities (Vanguard Utilities ETF (VPU) 3.58%). While the Utilities ETF gives a much broader exposer, hand picking a couple top tech stocks probably makes good sense. For a broader technology sector play you can pick up iShares US Technology ETF (IYW) and earn a 2.31% yield or Vanguard Information Technology Index ETF (VGT) yielding 2.12%

Technology dividends are still fairly low compared to a traditional dividend-rich sector, like utilities. But that means there's still lots of room for dividend growth, said Diane Jaffee, portfolio manager of the TCW Dividend-Focused Fund. At year-end 2013 the technology sector's average payout ratio was only 20 percent of cash flow, compared to 36 percent for the S&P 500, she noted.

Jaffee's fund has been buying dividend-paying tech stocks, including Microsoft, Cisco, Intel and Microchip Technology. For some tech giants, an increasing dividend profile is nothing new, but Jaffe is still betting on larger payouts. Intel has increased its dividend for 10 years and Microsoft for 12 years.

Bull Market Rivals '90s at Half Valuation

A very interesting article today from Bloomberg/Business Week:

During the stretch that lasted from March 1995 to March 2000, computer and software makers surged 754 percent, compared with 200 percent in the next-best industry, banks. By contrast, since March 2009, consumer-discretionary shares have jumped 324 percent, banks are up 259 percent, and industrial companies have risen 243 percent. The group with the smallest increase, phone companies, is up 68 percent.

...

After pulling $300 billion from mutual funds and ETFs that buy American equities from 2008 through 2012, they’ve since deposited almost $170 billion, according to data compiled by Bloomberg and the Investment Company Institute.