Diamond Offshore: Deepwater dollars
If you drill down, this company will look attractive to income-seeking investors.
This month we add Diamond Offshore Drilling (DO) to our Growth and Income portfolio. Why? The company has a compelling yield, an improving growth profile, and its industry is experiencing a recovery.
Diamond Offshore focuses on the deep- and ultra-deep-water market because that's where demand and day rates are expected to remain strong for the next few years. The company owns and operates one of the world's largest fleets of offshore drilling units.
The fleet includes 32 semi-submersibles, 13 jack-ups, and four dynamically positioned drill ships, three of them with expected deliveries between 2013 and 2014.
Its equipment lets the company offer equally diverse worldwide services in both the floater (ultra-deepwater, deepwater and mid-water) market and the non-floater, or jack-up, markets.
Since then, the total number of rigs has declined, as the company divested eight jackups and two midwater rigs, but the focus on ultra-deepwater and deepwater markets has resulted in Diamond having more than doubled its fleet there, from eight to a total of 19.
Of course, at first glance, Diamond Offshore, as a deepwater driller, may not look too enticing to most income investors: It's not exactly in a recession-proof business. Its yield, on the surface, does not look very high, either: if you measure the size of its regular dividends, they fall at under 1%.
However, over time the company has consistently paid "special" quarterly dividends -- and said dividends, since mid 2010, have held steady at 75 cents a share. Add them, and the annual yield pops to about 4.7%.
Since January 2006, Diamond Offshore has paid and declared more than $33 per share in overall dividends.
Going forward, the special dividend looks safe, as Loews Corporation (L) owns over half of Diamond Offshore -- and like all stockholders also reaps the special dividend. Thus, with Loews remaining the majority owner, we think there is little risk to the "special" dividends.
Another positive -- compared to its industry group -- is Diamond Offshore's balance sheet strength: The size of its long-term debt is about equal to the total cash it carries on its balance sheet.
This, plus the recent debt upgrade create financial flexibility and further enhances our investment case. Buy Diamond Offshore up to $78.
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