Reader Request - Ensign Energy Services Inc (TSE:ESI)
28 August 2007Dividends Matter reader Alice has requested that we have a look at Ensign Energy Services Inc which trades on the TSE under the symbol ESI. Western Canada economy has been booming. Has ESI been able to get its fair share? Let’s find out if this stock belongs in our portfolio of superior dividend yielding stocks.
Company Profile:
From Reuters
Ensign Energy Services Inc. is a provider of oilfield services in Western Canada, the United States and in certain foreign markets primarily through its subsidiaries and partnerships. Ensign is a drilling contractor in the United States, with a position in the Rocky Mountain and California regions. Ensign has two main contract drilling operating subsidiaries in the United States: Ensign United States Drilling Inc. and Ensign United States Drilling (California). Ensign United States Drilling Inc. is a land-based drilling contractor in the Rocky Mountain region. Ensign United States Drilling (California) operates in the San Joaquin, Los Angeles and Sacramento basins of California. Ensign also offers under balanced drilling, oilfield equipment rentals, camps and catering services, as well as oilfield manufacturing and production services.
Market capitalization of $2.86B.
Company Fundamentals:
As usual, let’s start with a look at management’s performance. Unfortunately, I was only able to obtain the last 5 years of data related to the return on invested capital. But the 5 years that I do have look great. A nice, steadily increasing ROIC from 10.7% in 2002 to 30.8% in 2006. The 5 year average ROIC is 21.8%.
The return on equity shows a different trend. Over the last 10 years, the average ROE has been 22.15%. However, the 5 year average ROE is lower at 19.46%. That can be partially attributed to the large 45% ROE produced in 1997. But like the ROIC, the ROE has been increasing nicely over the last 5 years.
Equity growth rate has been rock solid. The 9 year rate is 19.43%. The 5 year rate remains stable at 19.05%. The 3 year rate increases to 24.07% and last year’s equity growth rate was an extraordinary 42.68%.
Earnings per share growth rate has been even more impressive. The 9 year rate is 17.53%. The 5 year rate increases to 31.21%. The 3 year rate increases to 48.78% and last year’s EPS growth rate was a nice, round 100%!
Sales growth rates have remained fairly consistent with the 9 year rate at 17.29%, the 5 year rate at 21.98% and last year’s sales growth rate of 18.84%.
The company fundamentals definitely look impressive.
Dividend Fundamentals:
Current dividend yield is 1.74%. Considering that the S&P/TSX Composite Index has a dividend yield of 2.57%, I would consider this dividend yield below average.
But the dividend growth rate is another matter. The 9 year dividend growth rate is 19.6%. The 5 year rate is 26.31%. And last year’s rate was 108%!
Looking at the individual year growth rates, there is a lot of inconsistency from dividend growth rates of 2.67% and 4.08% to rates of 87.5% and 108.8%! This inconsistency makes it very difficult to forecast a future dividend growth rate with any amount of assurance.
Surely, with these massive dividend increases, management must be running out of room to maneuver with an ever increasing dividend payout ratio. But no. The dividend payout ratio is incredibly low at a mere 16.28%.
Cash flow growth rates have been excellent and increasing. The 9 year rate is 17.83%. The 5 year rate is 28.65% and last year’s rate was 71.5%.
Valuation Models:
Let’s use my 3 models to determine a fair price for this stock.
For my yield calculations, I typically prefer to use the 5 year average high dividend yield which in this case is 1.65%. However, last year’s high dividend yield reached 2.2%. Now, the 10 year average high dividend yield is 2.1%. So I will use that as my required dividend yield which means that I will not be willing to pay more than $15.24. That implies that a premium of 21% currently exists in the stock price.
Mr. Benjamin Graham would argue that the stock is fairly priced today since the Graham number works out to $17.59 or a 4.85% premium.
Using my discounted present value method, I used the following inputs:
- future P/E of 9.76 (this is the current P/E and is at a historical low)
- future EPS growth rate of 19.05% (this is the 9 year equity growth rate. Unfortunately, I was not able to find any forecasts so I will have to settle for my estimate.)
- dividend yield of 2.1% (the 10 year average high dividend yield)
- future dividend growth rate of 19.6%
That dividend growth rate is my biggest concern in this equation as the dividend growth rate has been very inconsistent from year to year.
With this information, my model price works out to $42.09. Now, of course, that means that I am not getting my required 2.1% yield. But you can definitely see what the large future dividend growth rate can do for any stock!
Here are my dividend analysis calculations for ESI.
Here is the 1 year stock price chart:
This stock has definitely come off its high set back in May 2006. It is trying to get to the model price of $15.24.
Conclusion:
Well, this was an interesting analysis. The company fundamentals look great. This stock looks like a super star. My biggest concern is the inconsistency in the dividend growth rate. It is all over the map.
I typically prefer steady dividend growers that I can count on to continue delivering those healthy dividend growth rates. But this stock is so tempting. The low dividend payout ratio coupled with the dividend growth rate and the solid company fundamentals.
I think I might put this in the speculative dividend payers group (just made that up!). It might be worth putting a small portion of your portfolio in this one.
Full Disclosure: I do not own shares in ESI.
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