On 12/1 I sold my shares of Helmerich & Payne (HP). This was one of my earliest buys in my 401k as I slowly started dabbling in individual stocks. It did not help that I bought in late 2014, catching the falling oil knife and subsequently seeing red for a very long time. Only as of late has the company roared back – most recently – to news on the OPEC cut agreement. In the end I did book a profit, most notably due to reinvesting the dividends received over the past two years.
When deciding to sell a stock I will go through an analysis to see if that is my best course of action. While in general I do believe the company will ride out this storm, this is one that I would not have purchased today knowing what I have learned over the past two years. Through trial and error, being in the oil patch is not something that I enjoy, at least not from a dividend growth perspective. I would prefer the smoother ride of other stable companies whose earnings are not highly controlled by outside influence, especially from geo-politically unstable regions. With that said, I would like to post some research that I have been reviewing.
The first note I am looking at is the price to cash flow chart from Fast Graphs. As you may have noted I use Fast Graphs a lot in my analysis. I see a bumpy and unstable ride. Cash flow spiked in 2015 at over $13 a share to then fall nearly 50% by year end 2016 to less than $7. This year looks to fall another 50% from last years figure as more of their oil rigs go unused. That said, analysts are currently projecting 26% growth in cash flow for next year. You can note the recent price uptick noted by the black line, which on this time horizon looks nearly vertical. The blue line represents the “typical” price to cash flow ratio the market will pay for the stock and it is now above the line, suggesting overvaluation.
Simply Safe Dividends
Simply Safe Dividends is another one of my research points. I like to look at the free cash flow payout ratio for any company I am researching. Earnings can be lumpy and can be massaged. As dividends are paid out of cash, in my mind, this is the only ratio to look at. You can’t fake cash. Again, this is a very bumpy picture to me. The negative numbers represent they lost money on the year, in addition to having to pay out the dividends. That isn’t always the case but the past two years the payout ratio has spiked to either being greater than free cash flow or thereabout. This means the company is issuing debt or shares in order to cover the dividend.
The scorecard for the company shows the overall picture in relation to the universe of stocks covered by Simply Safe. The safety score of 45 does not paint a picture I am terribly comfortable with. The price of oil is the biggest risk and outside of their control. That will dictate how many rigs their customers are looking to use. Unsurprisingly, the growth score is also quite low currently given the fact they are just holding on in this low oil price environment.
I’ll wrap here with a Fast Graph. This shows their historical PE ratio and the valuation the market typically assigns. When looking at earnings figures alone, this will be the bumpiest of all the rides. The company has now booked negative earnings for just about 2 years in a row and the current stock price, in my mind, is still quite decoupled with operating results. I feel the market has already priced in an oil recovery with the level the stock is trading. It will be a while before oil prices are sustained. Customers then need to rent rigs and for the company to book revenue and ultimately report it. I decided this was a good opportunity to close out the position and look for smoother and more predictable sailing.