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It’s hard finding high-yield stocks with secure dividends. It’s particularly true in the energy sector. Due to the steep decline in commodity prices over the past two years, a host of energy stocks have had to slash or outright eliminate their dividends to stay afloat.
But Helmerich & Payne (NYSE: HP) is an energy stock with a 5% dividend that appears secure. The company has a niche business model and has navigated the current crash well.
Moreover, Helmerich & Payne was recently an S&P 500 Dividend Aristocrat. It had raised its dividend for 42 years in a row until 2014, when it froze its dividend at current levels. Still, that streak was longer than even Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM) could boast.
Strategic Advantage
Helmerich & Payne is an owner and lessor of drilling rigs. At first glance, this would be an automatic red flag, since demand for oil rigs has fallen considerably alongside the dramatic decline in oil prices. What separates Helmerich & Payne from the rest of the oil drillers is that it has built a newer fleet of rigs than its competitors.
Furthermore, its fleet is technologically superior to the competition. The company specializes in advanced rigs built for drilling complex shale wells.
To be sure, the company is getting hit by the oil crash. Full-year revenue and earnings per share dropped 15% and 40%, respectively. With oil exploration and production companies slashing capital spending, this means less demand for rigs, and Helmerich & Payne is not immune.
The company’s advantage comes in its ability to remain profitable in such a challenging environment. While many of its competitors are posting huge losses, Helmerich & Payne still earned a profit and generated satisfactory free cash flow.
In 2015, Helmerich & Payne generated $285 million of free cash flow. That nearly covered its dividend, which cost $298 million in the same period. In a terrible year for the energy sector, the company deserves credit for not only generating positive free cash flow, but also nearly covering its dividend entirely from free cash flow.
Savvy Management
The other factor working in the company’s favor is its extremely savvy management team. Unlike many others in the oil and gas space, Helmerich & Payne has been managed very conservatively. It did not take on too much debt during the heyday for oil and gas firms. As a result, its balance sheet has survived relatively intact, even while commodity prices have crashed.
At the end of last quarter, the company held $895 million in cash and short-term investments on its balance sheet, along with another $85 million in long-term investments. That makes nearly $1 billion in cash and marketable investments, compared with $408 million in current liabilities. Moreover, its long-term debt-to-equity ratio is a comfortable 47%.
That shrewd financial management means that although the company is hurting financially, outright bankruptcy is not a pressing risk, as it currently is for many companies in the energy sector.
Going forward, management has plenty of levers to pull to continue generating enough cash flow to sustain its 5% dividend. The company can easily cut capital expenditures – and it plans to do just that.
After spending $1.1 billion in capital expenditures last year, Helmerich & Payne intends to reduce capital expenditures to a range of $300 million to $400 million in the current fiscal year. That should free up a great deal of cash flow, which can be used to raise its dividend once again and possibly buy back shares.
A Re-Energized Dividend
The energy sector has proven to be a mine field for dividend investors. Tantalizingly high yields have come and gone, as companies are taking an ax to their dividends just to stay alive. But Helmerich & Payne is navigating the tough climate much better than its rivals.
The company should generate more than enough free cash flow in 2016 to continue paying its 5% dividend. And even though it’s no longer a Dividend Aristocrat, Helmerich & Payne might return to dividend growth again this year as its capital spending comes down.
Even if it doesn’t raise its dividend, it’s very likely the current payout is here to stay. As a result, Helmerich & Payne could be a hidden dividend gem in the energy sector.
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