Sometimes we have a tendency to forget that the reason to own something is almost always to earn money on your investment — and that’s where dividends come in. Movements in stock prices and capital gains depend on the vagaries of the market, with stocks sometimes priced at 10 times earnings and sometimes at 30X earnings, but the hope is that your share of a company’s actual earnings — the corporate dividend — will grow more steadily in line with the growth in the underlying business and actually put some cash in your pocket.
So at times like these, when folks are fearful for the future movement of the S&P 500 and the Dow, wondering about a “double dip” and seeing weak stock prices and not-necessarily-cheap valuations, it’s no surprise that we get the “look for dividends” advice from lots of pundits, particularly folks who are reminding us to look at the relatively inexpensive, cash-heavy megacap stocks who grow their dividends year-in and year-out.
But we also get the high dividend advice — especially from teaser-meisters who are hawking their high-dividend newsletters, recommending stuff like preferred shares, income trusts, high yield bonds or closed end funds, and stocks that pay unusually large regular or special dividends. That’s what we’re looking at today, a pitch from Ian Wyatt for his High Yield Wealth newsletter that tells us we can earn buckets of cash from “The One Oil Company Paying Shareholders a 10X Bonus Dividend.”
So, not to put too fine a point on it, what the heck is he talking about?
Here’s how he introduces his idea:
“It’s no secret that oil companies are doing very well these days.“The fact is some are doing even better than what’s officially reported.
“I’ve analyzed many oil stocks and found one company that is delivering regular dividends more than 10x the published rate.
“They’ve been doing it for four straight years, including delivering dividends worth 20x the published rate one year.
“Few people know about this (I’ll let you know why the real dividend rates are not announced). If you’re looking for more income — and who isn’t with CDs and savings accounts yielding next to nothing? — you should consider getting in on this before the next payment.
“Here’s some information on this company and its secret bonus dividend you won’t get anywhere else, but you will today…”
Well, not to steal Mr. Wyatt’s thunder … but yes, you can learn a wee bit about this company’s “secret dividend” right here if you’ll just lend us your eyes for a few more paragraphs. Oh, and yes it’ll be substantially more well, free (though we also dearly love our Stock Gumshoe Irregulars, of course).
We’re told that this mystery company is connected to two billionaire brothers, which probably already gives some of you enough dots to connect in drawing our picture … but just in case, here’s some more of the spiel …
“The story of this oil company begins with two billionaires in the early 1990s (doesn’t it seem like billionaires and oil always seem to go together?). Their names are Bob and Larry and they were billionaire brothers who they wanted to put their money to work for them.
“So they looked for a business that produced hefty dividends. They found it and got in at the right time. The business?
“Offshore oil drilling.”
Some more hints about the stock?
“A good deal of this company’s drilling is in oil friendly South America — in particular Brazil….
“… the company I’m telling you about has one of the largest fleets in the world of semi-submersibles and high — specification rigs capable of drilling in very deep waters.
“So it’s not surprising it has more offshore rigs working in Brazil than any other company. And it is the largest offshore oil drilling rig provider for Petrobas, Brazil’s biggest oil company….
“The company achieved its equipment advantage early on in the development of the offshore oil industry. Soon after the billionaire brothers first formed the company, they amassed a large fleet of topflight rigs with their purchase of a competing drilling company.”
Wyatt goes on to tell us that the company has a policy of paying out significant sums to shareholders, and that part of the reason they keep doing it is that the insiders and the founding family own a huge chunk of the shares — dividends are how they get paid.
“Insiders (basically the family that inherited the company) own over 50% of the shares. This company has been a golden goose for the family — delivering dividends like clockwork.
“As an investor in the company you too can share in this golden goose. You can expect regular dividends to remain healthy and consistent — a steady stream of income for you — no matter what.
“And it gets even better. Remember those special, unannounced dividends I mentioned?
“You can pretty much count on those to continue also. You see, company insiders want those additional dividends (who wouldn’t!)…and business continues to boom.”
OK, so that’s probably enough about the company — why is it that there’s a special “bonus” dividend that’s 10 times higher? Is this not public info? Here’s what Wyatt says:
“By not publicizing the bonus dividend, the company maintains operational flexibility. You see, oil drilling is a highly variable business. This way the company is prepared to adjust to big changes should they occur.
“Yet the company has been delivering an unannounced, special bonus dividend that is added on to the announced dividend quarter after quarter for four straight years: that’s during the market highs, during the market crash, and continuing onward. And as I’ve noted, this special bonus dividend has typically been more than 10x the announced dividend.”
So there you have it — what is this offshore drilling company with the billionaire brother connection and the high but “secret” dividend?
As you might have guessed by now, it is Diamond Offshore (DO)
Which is a large company, one of the bigger ones in the offshore drilling space — their market cap is just under $10 billion and, unlike my favorite offshore driller, they carry very little debt. The dividend does look tiny at first glance at less than 1%, but that’s sort of the “committed” dividend that they leave on the books as a promise … it’s true that the “real” dividend has been boosted every quarter, seemingly forever, by a “special dividend.” And most of the financial info websites don’t track those special dividends very well, so if you look on Yahoo Finance, for example, you’ll see that DO has a yield of 0.7%. Which ain’t too exciting.
The real dividend is announced by the company each quarter, including on their website here, and it’s currently tracking at $3.50 per year — so on a $66 share price that’s a yield of right around 5%. Still not earth-shattering, and the dividend has actually been reduced in each of the last two years (it was $8 in 2009 and $5.25 in 2010), but it’s a lot better than the publicized regular dividend.
The billionaire brothers? That’s the Tisch family, founders and controllers of the Loews conglomerate (publicly traded, ticker is L) which also owns almost exactly half of Diamond Offshore (so yes, “insiders own more than 50%” of Diamond Offshore … though the family itself owns less than half of the Loews parent company — there are Tischs in the executive suite, they’re not passive owners). Loews is frequently analyzed by value stock fans (including yours truly) as a stock with a sometimes cheap “sum of the parts” valuation (Loews has an enterprise value of about $19 billion, the value of their holdings in DO, CNA Financial and Boardwalk Pipeline totals about $15 billion, and they have other non-public subsidiaries).
Diamond Offshore doesn’t have the newest or the largest fleet of deepwater rigs — that honor would go to either Transocean (RIG) or Seadrill (SDRL), but it’s up there among the larger ones, and like Atwood Oceanics (ATW) or Noble (NE) it’s arguably been more conservative than some of the foreign fleet builders like Seadrill, who have spurred the building of ever newer and more capable rigs over the last five years. Diamond and Atwood, for example, have often refurbished older rigs to enhance their capabilities or just been satisfied with second or third generation deepwater rigs instead of ordering new fifth and sixth generation $300 million rigs from the shipyards, which has meant that they aren’t as debt-burdened as some but they also don’t have the absolutely most capable rigs — a lot of their semisubmersibles, for example (those are the floating rigs that handle water that’s too deep for a jack-up rig — jackups have feet and rest on the ocean floor, semisubmersibles and drillships float), were built in the 1970s and 80s and top out at 2,000-3,000 feet of water depth capacity, whereas the latest generations of rigs can drill in 10,000 feet of water. There’s certainly still demand for the older rigs, and a lot of Diamond’s rigs are working offshore Brazil and in other hot areas of discovery, but they don’t get the maximum day rates and they can’t handle the deepest fields (like the huge Brazilian Tupi find, which is under about 6,000 feet of water).
I still prefer Seadrill personally, I own shares and profiled it for the Irregulars years ago, though Diamond Offshore would be my second choice for dividend-focused investors who want exposure to deepwater drilling or who are more conservative, particularly since Seadrill’s aggressive nature often means lots of debt and volatility in comparison to many of the US-based drillers, and I think Diamond is the US driller that’s most focused, as Seadrill is, on paying back investors with high dividends.
I’m not an expert on Diamond Offshore’s fleet or their strategy, this is all just my basic sense from keeping half an eye on them over the years, and from a quick glance at their financials. I would want to look into the reasons for their dividend cuts over the last couple years before investing, and to get a handle on the remaining usable life of their 30 and 40-year old rigs, which are still generating a lot of cash flow but probably won’t last forever. If you’re a rig investor or have a fondness for DO or one of their competitors, let us know what you think with a comment below.
Personal Capital has great tools for tracking spending (they can cut your spending by 15%), but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.