Like many retirees, we need to increase our income, which for years came from 4 and 5 percent yields on our certificates of deposit. We’re 75 and 78, and four years ago, we had $570,000 in CDs, paying us over $2,000 a month. But since 2011, we’ve had to invest in stocks I never heard of and take chances. For example, I bought Prospect Capital, which you recommended. I bought 900 shares at $10.61 in early July because it pays 13 percent and because you said the dividend is safe. I sure hope so. We have 11 other issues, four that you have recommended, yielding between 6 and 10 percent, but they make us nervous.
Our neighbor just bought 600 shares of Seadrill at $27 because he said it pays $4 and yields 11.1 percent, according to Yahoo Finance. I looked it up and did the math, and Seadrill yields 15.7 percent, but I’m uncomfortable contradicting him. Did Seadrill increase the dividend? If so, what do you think of this stock, because even if it’s just 11.1 percent, the dividend is pretty good?
— NR, Port Charlotte, Fla.
Dear NR:
The weed-smoking, sandaled sad sacks who manage Yahoo’s financial portal couldn’t find a burning candle in a dark room, even if they were sober. Investors can get their tutus in a twist relying on financial data from Yahoo, which are too often out-of-date, stale and incorrect. This must be embarrassing for advertisers on Yahoo’s sites. It’s certainly one reason Yahoo can’t increase advertising revenues.
Still, your neighbor was partly right. Seadrill, now $25, does pay a $4 dividend, but as you say, it yields 15.7 percent. However, many observers believe it’s iffy because the price of oil may be coming down. But the decline in Seadrill (SDRL), from $48 last fall, suggests potential above-average appreciation over the next 24 months.
This $5.2 billion-revenue offshore drilling contractor owns a large fleet of jack-up rigs (self-elevating mobile platforms), tender rigs (support platform for drilling rigs, equipped with housing facilities), semi-submersible rigs (marine vessels built for exceptional stability and safety) and drillships that are merchant vessels designed for exploratory offshore drilling, plus fleets of cranes and helicopters.
Revenues for 2014 will be lower than they were in 2013 because of drilling delays in field development from major oil customers, which created a decline in rates for SDRL’s costly equipment. Day rates for drillships range between $260,000 and $520,000. Jack-up rigs rent for between $110,000 and $175,000. Tenders run between $130,000 and $165,000 a day. And submersibles get between $400,000 and $600,000 daily. That’s a chunk of cash compared with the $6,000 it cost to drill America’s first oil well in Titusville, Pennsylvania, in 1859. But SDRL’s practice of contracting out rigs ahead of time tends to insulate it from headwinds that affect revenues and earnings during the near term. Though utilization and day rates have come down 16 percent from last year’s peak, robust demand from Mexico, Asia and Africa indicates that SDRL’s rigs will be kept modestly busy till the majors scramble to become more aggressive in 2015.
Industry analysts believe that revenues should improve to $6 billion in 2015, that earnings could rise to $3.40 and that SDRL’s having a healthy balance sheet plus a strong cash flow ensures the $4 dividend. I think they’re bonkers! Morningstar believes that SDRL could increase its 2015 dividend to $4.40-$4.45. And after the ensuing few years, with an improved global economy and higher energy usage, the stock could trade between $65 and $70. I don’t agree. Other offshore drillers — Ensco (ESV-$38), yielding 7.9 percent, Transocean (RIG-$30), yielding 9.6 percent, and Noble (NE-$21), with a 7.5 percent yield — have also sold off significantly from their 2013 peaks and may also recover. Though analysts suggest their dividends are sustainable because of strong cash flows, they scare the bejabbers out of me.
You’re in the same boat with millions of other retirees who have high-yield nervousness. But what choice do you have? Frankly, you’re double-damned; you’re damned if you don’t and damned if you do. This stock is too risky for you folks, and I’d not be surprised if SDRL and the others cut their dividends.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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