Image Source: National Oilwell Varco corporate website.
Energy companies have had such a rough go of it this year that even some of the companies we thought had solid business foundations have gone to drastic measures, such as cutting dividends . Some of the early signals suggest that oil and gas activity isn't going to get much better in 2016, and that has some investors wondering if another rock-solid company like National Oilwell Varco might not be able to raise its dividend. So, let's take a look to see if National Oilwell Varco has the ability to raise its dividend in the coming year and, more importantly, whether the company should.
Keeping up with the cash flows
One of the advantages that National Oilwell Varco has compared to other larger oil service companies is that it doesn't have a lot of a lot of continuing capital investment requirements. Other service companies such as Schlumberger and Halliburton have large fleets of equipment that need to be maintained. By contrast, National Oilwell Varco is mostly in the business of manufacturing that equipment. So, as times get tight, the company is in less of a panic about cutting capital spending.
Capital expenditures (YTD 2015, in millions)
National Oilwell Varco
Source: S&P Capital IQ.
Even though the company has seen a large build of inventory that has eaten into the company's cash so far this year, it has still been able to generate enough cash to more than adequately cover its capital spending and a large portion of its dividend. Not including cash expenditures for its share repurchases, National Oilwell Varco was only about $115 million short of covering its capital spending and dividend with operational cash. With $1.8 billion in cash on the balance sheet, there is more than enough there to cover the minor cash shortfall.
The other encouraging aspect of the business is that it still has a pretty healthy balance sheet. It is part of the reason why the company has been able to use debt over the past 12 months to repurchase $3 billion worth of the company's stock. If National Oilwell Varco found itself in a pinch, it has the ability to take on a little bit of debt to keep things humming along.
"Can" and "should" are two different things
Based on the company's recent results, it would seem that a dividend increase in 2016 is possible. However, if we look at National Oilwell Varco's business prospects for 2016 and beyond, it's probably in the company's best interest to stand pat with its current payout.
When drilling activity picks back up again, chances are producers' first phone calls will go to service companies like Schlumberger and Halliburton to get crews out in the fields again. In contrast, National Oilwell Varco's largest business segment -- rig systems -- will probably be one of the last parts of the industry to feel the effects.
First, producers need to see their cash flows increase to justify renting some new rigs. Rig owners will likely fill that demand with the large amount of idled equipment. Once those rigs are all put to use, then rig owners will need to replenish their cash flows enough to justify spending for a new piece of equipment, which is when National Oilwell Varco's rig systems segment will see the impact. With such an oversupply of rigs right now, it could take several months after the turnaround before this business sees an effect.
Granted, its other business segments like rig aftermarket (spare parts for existing rigs) and wellbore technologies (equipment for new wells) might see a quick surge once activity picks up again, but it will be hard to replace rig systems' income during that time.
With so much overhang on the company's bread and butter business segment, though, it's probably in the company's best interest to keep its dividend payout right where it is now until we see increases across all of the company's business segments.
What a Fool believes
National Oilwell Varco may be capable of boosting its dividend to shareholders if that was absolutely necessary, but anyone looking to hold a long-term investment in the company should actually hope the company decides not to and keeps the cash around until we see all of its business segments firing on all cylinders. The company has only been paying quarterly dividends for five years, so it's not like it has to keep up a dividend aristocrat streak like some other players in the space.
Besides, with shares trading at a yield around 5.5%, investors can't complain too much about not getting paid. Rather, this may be the time to add to any position in the company to reap the benefits of such a high yield.
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The article Will National Oilwell Varco Inc. Raise Its Dividend in 2016? originally appeared on Fool.com.
Tyler Crowe owns shares of National Oilwell Varco. You can follow him at Fool.com or on Twitter @TylerCroweFool .The Motley Fool owns shares of and recommends Halliburton and National Oilwell Varco. 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 .
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