On Friday morning shares of the country’s largest oil service company, Schlumberger (NYSE:SLB), hit a multiyear high. While it is usually never a good idea to buy a stock at a multiyear high, the fact that investors are confident in the name suggests that it is a name to consider buying on a 5 to 10 percent pullback.
Schlumberger is an oil service company, meaning that it leases drills, equipment, and technology to oil companies. Schlumberger helps oil companies in all aspects of the oil extraction business, from exploration to production. As the leader in the industry, Schlumberger has strong pricing power. Furthermore, it has steady revenues despite near-term volatility in the oil and gas markets. So long as oil and gas demand remain strong, there will be demand for Schlumberger’s services, and this is great for the business.
Furthermore, in a strong oil market, the company has the power to raise its prices, and this is good for margins and profitability. Therefore, investors looking for exposure to the oil market may want to buy shares in a company such as Schlumberger rather than in one of the more popular oil investments, such as Exxon Mobil (NYSE:XOM). While the latter will benefit more directly from rising commodity prices, Schlumberger will have consistently strong profitability, and those investors who are risk-averse should consider taking a position.
Schlumberger trades with a price-to-earnings multiple of 19, although the company is expected to grow its earnings in the next couple of years — the shares trade at just 15 times 2015 analyst estimates. Furthermore, as positive as analyst expectations are, the company has recently been growing more rapidly. Last quarter’s earnings grew by more than 30 percent as margins improved and the company grew its business in this relatively high oil price environment.
Furthermore, the company has done an excellent job of returning capital to shareholders, and of growing the amount of capital that it returns to shareholders. Right now the company pays a 40 cent per share dividend per quarter. This isn’t a lot for a company with a share price of $104, but the company has grown its dividend substantially over the years. In the past 10 years, the company’s dividend has grown more than fourfold, which means that it is growing its payout by an annual rate of about 17.5 percent. This rate was even faster with the most recent dividend increase, which was a whopping 29 percent.
Investors will also be pleased to learn that the company has been repurchasing its own stock. Over the past four years the company has repurchased about $7 billion worth of stock, and it has retired more than 60 million shares. This isn’t a very aggressive buyback, but it has been an effective one, and the company has balanced buybacks with dividend payments.
All of these points make Schlumberger an intriguing investment opportunity, especially for long-term investors and investors looking for a stock to buy for the dividend income in 10 to 20 years. While there are less expensive and more exciting opportunities in the oil service space, Schlumberger has the least amount of risk given its size and its clout in the industry. Even if there are more intriguing opportunities in the industry with, for instance, a new value-generating technology, there is a good chance that Schlumberger has the capital needed in order to buy them out without diluting shareholders.
Ultimately, if you are looking for a stable business to invest in that will benefit from rising oil prices but which is also immune from volatility in the energy market, then Schlumberger is an excellent stock to buy. Currently, as I said earlier, the stock trades at a multiyear high. Even though the stock is compelling now, it is always prudent to wait for a pullback. I wouldn’t be surprised to see the company retest the 2011 highs, or about $93 per share, as this high marked a significant intermediate-term top before a multiyear consolidation. If the stock hits this price point, it will be a strong buy.
Disclosure: Ben Kramer Miller is long Exxon Mobil.