Bernstein's Colin Davies and Laura Tao take a look at Schlumberger (SLB) on Tuesday, writing that while under normal circumstances, the company would be considering raising its dividend when it reports fourth-quarter earnings, it's far from certain at this point.
They reiterated an Outperform rating and $80 price target on the stock, but they don't have good news for income-oriented investors. They write that Schlumberger did raise its dividend during the last two commodity cycles, about two years after the price of oil inflected and about one year after its own sales inflect, and typically those increases came in January. Yet this year, after accounting for existing capital commitments, they write that there isn't enough operating cash to cover flat dividends and buybacks, "let alone an increase."
That's not to say that a dividend raise is out of the question: They write that it could draw on its cash reserve to fund an increase, but they're skeptical it will choose this route, as in the past Schlumberger has preferred to hike its payout when it has enough cash to sustain increases for the foreseeable future and cover its other costs.
That said, if the company does increase its dividend, Davies and Tao write that, "given the current financial profile, it should be taken as a very positive indicator for the international oil field outlook.
More from the note:
Although 2018 operating cash flow is expected to be similar to 2008 levels, dividend burden has tripled and SPM projects are a competing use of cash. The dividend increases during the last cycle, compounded with the Cameron acquisition (partially funded by stock), has tripled Schlumberger's dividend burden. On top of that, Schlumberger spends ~$650 million to $1 billion+ of cash per year on SPM projects. Together, the existing cash return burden and SPM capital commitments reduce the likelihood of a dividend increase, although new SPM activity could reduce if the oil price firms.
Schlumberger is up 0.3% to $75 this morning.