While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Seadrill Ltd (NYSE: SDRL ) slipped 1.5% this morning after Wells Fargo downgraded the offshore driller from market perform to underperform.
So what: Along with the downgrade, analyst Matthew Conlan lowered his price range to $30-$33 (from $40-$42), representing as much as 20% worth of downside to yesterday's close. While contrarians might be attracted to the stock's steady decline in recent months, Conlan thinks there's more room to fall given the riskiness of its high-yielding dividend.
Now what: According to Wells, Seadrill's risk/reward trade-off is particularly unappealing at this point. "It has long been our analysis that SDRL's aggressive dividend policy has never been funded solely by the operations of its high-quality fleet, but instead has been funded through the sale of i) equity (and convertible debt) in SDRL, ii) equity in sponsored 'child' entities ... and iii) the outright sale of rigs (including sales to its child entities)," noted Conlan. "As equity and asset values are slipping, we think SDRL may fail to secure the sales prices and external financing required to sustain its current dividend." Of course, with the stock now off more than 20% from its 52-week highs, and trading at a P/E of seven, much of that concern might already be baked into the price.
More reliable ways to build wealth
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks, as a group, handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks, in particular, are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.
RSS Headlines
Fool UK
Comments from our Foolish Readers
Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the
Report this Comment icon found on every comment.
Report this Comment On February 12, 2014, at 1:04 PM, HoerthCM wrote:
Don't panic. A look at Seadrill's statement of cash flows shows that it can support the dividend from cashflow alone.
Yes, the company is spending a lot in capex, but that is for expansion. Seadrill could, theoretically, stop its capex tomorrow if debt markets froze up.
Add your comment.