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.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of 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.