1 Great Dividend You Can Buy Right Now

This oil drilling contractor recently boosted its dividend by 50% and is yielding nearly 5% despite trading below its book value.

Mar 31, 2014 at 7:05AM

Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.

Today we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.

This week, we'll turn our attention to offshore oil and gas drilling contractor Noble Corp. (NYSE:NE), and I'll show you why this company is quickly becoming an income investor's dream stock.

Offshore Rig

Source: Department of Energy, Wikimedia Commons.

The threat of oversupply
Despite a bounty of opportunity in offshore drilling, things haven't gone well for contract drillers onshore or offshore in recent quarters. Many large oil companies have scaled back capital expenditures due to global economic uncertainty caused by erratic growth in China and political tensions such as the ongoing dispute between Russia and Ukraine. The end result has been erratic profit outlooks for service contractors in shale deposits on land due to an oversupply of fracking equipment, as well as offshore in the Gulf of Mexico where an increasing number of rigs are fighting for the same piece of pie.

Over the past few months, we've heard the warning cries from practically every facet of the oil and gas servicing industry. In November, for instance, oil contracting giant Transocean (NYSE:RIG) announced that approximately one-third of its deepwater fleet could be looking for work next year. Noble followed suit in mid-March when it updated its fleet contract status, which included a handful of early terminations from customers around the globe.

Adding insult to injury, some skeptics believe that even if demand comes back, there's a possibility that key players such as Seadrill (NYSE:SDRL), which is introducing a number of new rigs over the next six years, could stymie dayrate growth.

A bounty of opportunity
Every company has risks, and the risks listed above are the primary reason that Noble is trading very close to a 52-week low. But Noble also offers a bounty of potential rewards.

First and foremost, the Obama administration has made it clear that developing domestic sources of oil and gas production is paramount to reducing the United States' reliance on foreign oil imports. This means an increased focus on shale development, as well as renewed permits to produce in both shallow water and deepwater settings in the Gulf of Mexico. This should benefit Noble and its rivals, providing more than enough long-term demand to outweigh the introduction of Seadrill's new fleet in coming years.

Second, because the barrier to entry in the offshore drilling space is so high, I find it highly unlikely that the introduction of new drilling rigs will greatly affect contract pricing. Because Noble's rigs are scattered throughout the globe, providing ample geographic diversity, and there are few deepsea drilling options available for exploration and production oil providers, I would be shocked if Noble didn't continue to see its dayrates expand overall.

Another almost forgotten point these days is Noble's plan to divide its operations into two separate companies, taking its cue from other successful oil and gas companies that have recently split and seen shares of both resulting entities soar. Noble's plan, expected to be approved next quarter and enacted by year's end, would split the company into a shallow-water contractor with approximately 45 rigs and a deepwater contractor with close to 35 rigs. As expected, the deepwater component would boast the juiciest margins and highest dayrates, but it should allow for better revenue and earnings clarity for investors, which I suspect will help push its overall share price higher.

Finally, valuation plays a role in my renewed interest in Noble. Due to weakness throughout the entire sector, Noble is currently valued at a minuscule single-digit forward P/E and is actually trading at a fraction below its book value, offering value-seeking investors the chance to hop aboard at a reasonable price.

Show me the money!
Perhaps the most intriguing aspect of Noble, aside from the expected growth in oil demand around the globe, is its rapidly growing dividend. In January, Noble announced that its board had approved a 50% increase to its quarterly payout, from $0.25 to $0.375, or $1.50 annualized. Based on Noble's latest closing price, shareholders are looking at a yield of nearly 5%, which would trounce any CD or Treasury bond that investors could might find today. Furthermore, with a payout ratio of just 45% based on its estimated 2014 EPS, Noble's dividend looks highly sustainable and even likely to rise when contracting demand improves.

OPEC is absolutely terrified of this game changer
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Seadrill. It also owns shares of Transocean. 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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