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Faisal Humayun
Faisal Humayun
Articles (663)  | Author's Website |

Enesco Offers Stable Earnings And High Dividends

June 27, 2014 | About:

Enesco (NYSE:ESV) has a dividend yield of 5.4%, which is likely to grow and a stable earnings profile. This article discusses the key positive factors that make the company an investment worth considering from a stability and dividend perspective.

The factor that attracts me the most for considering investment in Enesco is the kind of dividend growth offered by the company in the last few years. From a dividend payout of $1.5 in February 2012, the company’s dividend payout has doubled to $3.0 by November 2013. At a current market price of $54.6, Enesco offers a dividend yield of 5.4%.

A more important point is the company’s ability to sustain dividends at current levels and also grow dividends over the next few years. In my opinion, this is very likely considering some important factors.

As of March 2014, Ensco had a strong contract backlog of $10 billion and this provides the company with a strong revenue visibility. A robust cash flow visibility also implies sustained dividends and Enesco’s dividends should remain stable or trend higher from current levels.

Further, I am of the opinion that the company’s dividend will trend higher from current levels. The key reason is that Ensco has eight new rigs to be delivered through 2016. Of this, three rigs, to be delivered in 3Q14 and 1Q15 are already contracted. It is very likely that the remaining rigs will also be contracted as their delivery nears.

The eight new rigs will therefore provide an additional revenue and EPS growth momentum and this will help Ensco to increase its dividends over the next two years.

On a relative basis, Ensco will also have the advantage of one of the youngest fleet in the industry after the delivery of new rigs. While Seadrill (NYSE:SDRL) has the youngest fleet with an average age of 3.4 years, Ensco fleet will have an average age of 4.0 years.

These two companies will therefore be far modern as compared to Noble Corp. (NYSE:NE) and Transocean (NYSE:RIG), which have an average fleet age of 8.5 years and 9.0 years. I am certainly not suggesting that Noble or Transocean are bad investments. Transocean, as an example, has a dividend payout ratio of 67%, which is higher than of Ensco’s 53%. However, on a fleet modernization program, Ensco is ahead of few peers. Since 2009, the company has sold 14 rigs and this has resulted in $90 million pre-tax gain on sales.

Another positive factor for Ensco is the low leverage, which comes from regular asset sales for fleet modernization. Ensco had a leverage of 27% as of March 2014 and this is significantly lower than Seadrill, which had a leverage of 65%. Noble and Transocean have a leverage of 40% and 39% respectively.

High leverage is certainly not a negative as long as debt servicing metrics are comfortable. I am talking about Ensco’s low leverage from the perspective that the company has eight new rigs for delivery through 2016. A low leverage ensures that the company has sufficient financial flexibility to fund the growth plan.

From a valuation perspective, Ensco is currently trading at an EV/EBITDA valuation of 7.4. This is attractive as compared to Seadrill, which is trading at an EV/EBITDA valuation of 12.5. I have considered Seadrill for the purpose of valuation as both these companies are closest in terms of fleet age. Therefore, from a valuation perspective, Ensco is a value buy for the next few years.

The company has eight new rigs for delivery by 4Q16 and as new rigs (with higher day rates) commence operations, Ensco’s valuation will get better. Also, the new rigs will ensure that the company sustains its high dividend growth. In conclusion Ensco is a value buy for the long-term with robust growth prospects and a high dividend yield.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with eight years of experience in equity research, credit research, economic research and financial modeling.

Visit Faisal Humayun's Website

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