Diamond Offshore Drilling (DO): A more "regular" special dividend; maintain Conviction Buy rating - Goldman Sachs
News
Diamond adopted a policy of considering paying special cash dividends, on a quarterly basis, rather than annually. A special cash dividend of $1.25/share and a regular quarterly cash dividend of $0.125/share were also declared both are payable on December 3, 2007 to shareholders of record on November 2, 2007.
Analysis
(1) We believe investors are likely to view the special quarterly dividend as more stable than the previous annual dividend policy. This more-consistent policy is likely to attract more yield-oriented investors, which could cause a re-rating of Diamond shares, in our view.
(2) Short-term investors that were expecting a $5.50-$6.00 special dividend to be paid in March 2008 may be a little disappointed. We estimate that the time value of money difference could cause the shares to be worth 2.5%-3% less to these investors.
(3) We see upside to the special quarterly dividend over time. For example, if DO were to pay quarterly special dividends of $1.25 through 2008, we estimate that the ending cash balance would be ~$994 million. Assuming that excess cash is anything above $500million, we believe that an additional $3.50/share could be paid in 2008. If we extend this to 2009, an additional $1.2 billion of cash (or $8.42/per share) would accumulate.
(4) Diamond's contract coverage supports a consistent special dividend, in our view, with 75%/52% of 2008/2009E revenues in backlog.
Implications
We view the news positively. Should there be any weakness caused by shorter-term investors exiting the stock, we would recommend buying aggressively. We believe a higher special quarterly dividend ($1.37-$1.50) would be manageable and view the $1.25/share as consistent with the conservative nature of Diamond Offshore's board. We do not believe that the implied balance sheet flexibility foreshadows increased investments but expect this to be a near-term concern for investors and a topic of next Thursday's conference call. Our price target and estimates are unchanged. |
