Will Seadrill Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

When it comes to drilling, the place to be lately has been the deepwater. Despite the big challenges involved -- or perhaps because of them -- the profit potential of deepwater drilling is huge, and Seadrill (NYSE: SDRL  ) has done arguably the best job tapping into that money-making idea. But how long can the good times last for the drilling company? Below, we'll revisit how Seadrill does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Seadrill.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$19.3 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

1.98

Fail

 

Worst loss in past five years no greater than 20%

(69.1%)

Fail

Valuation

Normalized P/E < 18

50.34

Fail

Dividends

Current yield > 2%

8.5%

Pass

 

5-year dividend growth > 10%

NM

NM

 

Streak of dividend increases >= 10 years

3 years

Fail

 

Payout ratio < 75%

159.6%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. NM = not meaningful; Seadrill started paying a dividend in June 2010. Total score = number of passes.

Since we looked at Seadrill last year, the company has dropped two points, stemming from a massive drop in earnings from Seadrill's affiliates that pushed valuations and payout ratio higher. Yet the stock has moved higher by more than 20% over the past year.

For a long time now, all the action in offshore drilling has been on the deepwater side of the business, where Seadrill excels. With an increasing number of new discoveries being made well beyond shallow continental shelves, shallow-water specialists Hercules Offshore (Nasdaq: HERO  ) and others are at a big competitive disadvantage to Seadrill. Transocean (NYSE: RIG  ) has recognized that fact by selling off shallow-water rigs in order to focus on its deepwater drillships.

But even in the ultra-deepwater, Noble (NYSE: NE  ) and Diamond Offshore (NYSE: DO  ) have come out with some troubling trends. Noble reported a drop in dayrates, while Diamond saw utilization rates drop sequentially. Seadrill won't report until the end of the month, but if it confirms this trend, it could mean that the hot ultra-deepwater market may finally be starting to cool down.

For now, though, Seadrill is on top of its game. With dayrates as high as $600,000, Seadrill is outpacing even Transocean's recent contracts in the $520,000 range.

For retirees and other conservative investors, though, the question is how long the good times can last. Although the dividend shows little sign of dropping, earnings need to rebound sharply and quickly in order for that payout to be sustainable. Nevertheless, if you're willing to deal with some extreme volatility and believe earnings will bounce back quickly, then Seadrill still looks like the most promising player in the space.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

This short article gives you just a taste of what Seadrill's all about. To find out whether Seadrill's really a smart buy right now, drill down deep below the surface and learn more about the strengths and weaknesses of this company. Our brand-new premium report put together by one of our top Stock Advisor analysts will give you the whole scoop on Seadrill. Click here to get started.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean and Seadrill. Motley Fool newsletter services recommend Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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