3 Dividend Stocks With High Revenue Visibility

Anjum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The current economic condition favors high dividend paying companies as a better investment than bonds, as inflationary conditions continue to erode the value of a bond. This article discusses three such companies, which also have high revenue visibility making them a safe investment option.

Undervalued dividend stock

Seadrill Limited (NYSE:SDRL) is an offshore deep-water drilling company. The company operates a fleet of 57 units that consists of drillships, jack-ups and semi-submersible rigs for operation in shallow to ultra deep-water areas. Seadrill is one such company which has high dividend growth potential with high revenue visibility.

At a current price of $44.20, Seadrill offers a dividend yield of 8%. More importantly, the company has been increasing dividends over the years and this suggests strong growth and robust free cash flows to pay high dividends.

Currently, Seadrill has an order backlog of $19.1 billion, which gives 4.3 years of revenue visibility based on 2012 annual revenue. Further, the backlog is with strong counterparties and this ensures that the cash inflow is certain and steady. As such, the growth and dividend visibility remains.

In terms of growth in the future, Seadrill has orders for four jack-up rigs, each with an investment of $230 million. Seadrill is also in the process of expanding its ultra deepwater fleet with West Tellus, another drilling unit available in 2013.Three more deepwater units are under construction and will be under contract from 2014 with average contract durations  of 44 months. As the new fleet comes into operation, there will be an incremental impact on revenue growth and the bottom-line.

In all likelihood, the robust expansion plan will translate into an even-higher dividend payout. The current financials of the company are also healthy with an Earnings Before Interest, Taxes Dividends and Amortization (EBITDA) for the first quarter 2013 at $713 million, the best figure so far. The company has a leverage ratio of 3.6, which is not a concern considering a very high interest coverage ratio of 57.2. With a current Price/Earnings (PE) multiple of 18 and future earnings growth estimate of 30%, the Price to Earnings Growth (PEG) ratio for Seadrill is 0.6 making it a good value investment. Thus, with a current dividend yield of 8%, high future revenue visibility and attractive valuation, this stock can be considered for a regular flow of income.

Master limited company masters in dividend

Terra Nitrogen Company, L.P (NYSE: TNH) is a master limited company and has a current yield of 8.60%. The company produces nitrogen fertilizer products such as anhydrous ammonia and urea ammonium nitrate solutions.

Net sales in first quarter 2013 have increased by 14% to $223.7 million. Further, the Compound Annual Growth Rate (CAGR) for revenue from 2009-12 has been 12% with the net income CAGR for the same period at a robust 140%. Cash flow for Terra Nitrogen is strong with operating and free cash flow at $571.4 and $524.7 million respectively for fiscal 2012.

Capital expenditure has increased from $8.7 million in 2011 to $46.7 million in 2012; the company is further in plans to increase its capital expenditure to around $90 million in 2013, to invest in upcoming projects like rail yard expansion and new ammonia and UAN storage tanks. These investments indicate strong future revenue visibility. The company has a strong balance sheet with zero debt, giving the company significant financial flexibility.

Cash distributions for the company have been robust as shown in the graph. There has been an increase in payout over regular intervals with a total distribution of $8.31 in fiscal 2013. With strong financials and only 18% of its free cash flow distributed in dividends, Terra Nitrogen has a huge scope to increase its dividend payout.

<img alt="" src="http://g.fool.com/editorial/images/63310/untitled_large.png" />

Another offshore stock

Teekay Offshore Partners L.P (NYSE: TOO) is a provider of marine transportation, oil production and storage services to the offshore oil industry. Currently the company has 33 shuttle tankers with four more newbuilds expected to be delivered by 2013, four floating production,storage and offloading (FPSO) units capable of producing 142,000 bbls per day, six floating storage and offtake (FSO) units with storage capacity of 5 million bbls and six conventional oil tankers. The company has a leading position in North Sea and is expanding its operations in Brazil.

Forward revenue visibility for Teekay is $4.8 billion with the weighted average remaining contract life of 5 years. The company’s revenue visibility is boosted by new builds with one of the four shuttle tankers’ delivered and the remaining three to be delivered before November 2013. The company has also got  a 10-year contract to convert an existing shuttle tanker to an FSO which is expected to generate Cash flow from vessel operations (CFVO) of approximately $6.5 million annually.

Voyageur Spirit,another FPSO , acquired for $540 million on May 2, 2013 is an important step towards increasing annual CFVO by approximately $70 million. The fundamentals of the company are also strong with 193% CAGR of net revenue from fiscal 2008 to fiscal 2012. As of first quarter 2013 the company has generated $41.8 million distributable cash flow. With a current dividend yield of 6.5% and the company’s strategy to steadily increase the dividend payout ratio, the stock is a great investment opportunity.

Conclusion

Investment in these stocks will cumulatively give an annual dividend of around $25. Moreover, the return can be expected to increase given the undervaluation of Seadrill, strong and high payout of Terra Nitrogen and good revenue visibility of Teekay. These stocks can be considered good investments on a medium to long-term perspective.


Anjum Khan 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus