Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the oil-field services industry offer the most promising dividends.
Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.
As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."
When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.
When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:
- The current yield
- The dividend growth
- The payout ratio
If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.
Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.
Peering into oil-field services
Exterran Partners stands out among the highest-yielding stocks in oil-field services, recently yielding 9%. But it's not necessarily your best bet, since its payout ratio tops 200%, revealing the company paying out much more than it is earning and suggesting that its dividend may be unsustainable if it doesn't up its income.
Instead, let's turn to the dividend growth rate, where Core Laboratories leads the way with a five-year average annual dividend growth rate of 76%. That growth rate is so steep, though, that it will be hard to maintain for long. RPC's (NYSE: RES ) 20% growth rate is also steep. Both companies have low payout ratios, though, leaving room for growth, for at least a while. RPC's fans like its low debt and its above-industry-average profit margins, among other things. The stock fell recently on a poor earnings report, but some think that was a market overreaction.
Some oil-field services companies, such as Flotek Industries (NYSE: FTK ) , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. With a market cap of around $600 million, Flotek has been beefing up its capacity through expansions, and has been improving its products such as drilling motors, as well as introducing new ones.
As I see it, RPC offers the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future.
But others, such as Schlumberger (NYSE: SLB ) , Halliburton (NYSE: HAL ) , CARBO Ceramics (NYSE: CRR ) , and even Exterran Partners, bear watching and consideration, too. Schlumberger, yielding 1.6% and with a five-year dividend growth rate of nearly 14%, is huge, with diverse operations and strong growth. It's also the largest seismic imaging company, serving deep-sea exploration. Yielding 1.1% with a 3% dividend growth rate, Halliburton is also huge and diverse, and is also the world's top provider of fracking services. CARBO Ceramics recently yielded just 0.9%, but sported a dividend growth rate of nearly 15%. It also supports the controversial but profitable fracking operations of various companies. It's relatively small, too, with lots of room for growth.
Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.
Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.
Looking for some All-Star dividend-paying stocks? Look no further.