Drilling for oil and natural gas is a highly cyclical business that makes paying a substantial, consistent, and growing dividend difficult, at best. But one company has managed this feat -- and without sacrificing the integrity of its balance sheet. If you're looking for the best dividend stock in the drilling-services industry, look no further than Helmerich & Payne, Inc. (HP +0.12%). Here's why.
It starts with the yield
For many dividend investors, the initial screen is for stocks with big dividend yields. That's the first place where Helmerich & Payne is going to shine since it offers a roughly 4.2% dividend yield, materially more than its next closest peer Nabors Industries Ltd. (NBR 1.60%), which sports a yield of about 3.6%. Both of these yields, meanwhile, are more than what you would get from an S&P 500 Index fund.
After these two drilling-services players, however, dividend yields fall off fast, with Patterson-UTI Energy, Inc. (PTEN 1.88%) offering just under 1% -- about half the market's yield -- and other close competitors not paying any dividend at all.
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But a high yield shouldn't be the only metric you look at -- it's just a starting point for picking the best dividend stock. Helmerich also shines when it comes to dividend consistency and growth.
Although the company's planned dividend increase in August is just a token $0.01 per share (a roughly 1.4% jump), it extends the driller's consecutive annual streak of dividend hikes to an incredible 46 years. That's a record that none of its direct peers can come close to matching and shows that Helmerich & Payne considers the dividend an important component of investor return in both good years and bad.
What's the dividend built on?
By having the largest yield and the longest dividend increase streak, Helmerich & Payne stands out as a dividend stock, but that's not where the industry differences end. Another key factor for investors to look at when examining dividend stocks is the financial and business foundation on which dividends are being paid.
Luckily, Helmerich stands above its peers here, as well. For example, debt makes up roughly 10% of the contract driller's capital structure. That's a low number for any company, let alone one that operates in a cyclical industry. That metric at Nabors is about 60%, which would be a much more worrisome figure during a downturn. Patterson-UTI's debt is very reasonable at around 20% of its capital structure, but the under 1% yield doesn't even come close to matching Helmerich's yield of more than 4%.
|
Company |
Yield |
Market Share of U.S. Land Drilling |
Market Share Change Since Downturn |
|---|---|---|---|
|
Helmerich & Payne |
4.2% |
around 20% |
4% gain |
|
Nabors Industries |
3.6% |
around 17% |
1.5% gain |
|
Patterson-UTI |
0.9% |
around 10% |
0.5% loss |
Data source: Helmerich & Payne Inc.
Although all of these companies have businesses that extend beyond U.S. onshore drilling, this is by far the largest contributor to Helmerich's top line, so it's the market leader in the area that's most important to its financial results.
Helmerich & Payne also has been executing particularly well on an operational level lately. During the drilling downturn following the mid-2014 oil price decline, every major drilling-services company suffered through a period of falling utilization. Now that oil prices are higher and utilization has started to increase, however, Helmerich & Payne was able to increase its market share. Helmerich & Payne isn't just a big player in U.S. onshore drilling, but it's clearly executing better than peers, as well.
The easy pick
Helmerich & Payne is the easy choice as the top dividend stock in the oil and gas drilling-services sector. That doesn't mean it can avoid the ups and downs of the sector, including the often high costs of keeping its fleet at the leading edge of the industry technology-wise.
But when it comes to dividends, the company has clearly demonstrated a commitment to rewarding shareholders with a large and growing dividend backed by a financially strong company that's a leader in its core operations. Helmerich & Payne is easily the best dividend stock in the oil and gas drilling-services sector.
