Market Overview

A Look At How Seadrill Crashed To Historic Lows

A Look At How Seadrill Crashed To Historic Lows
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Seadrill Ltd (NYSE: SDRL) shares are down 20 percent this week. The catalyst for the decline was a huge earnings miss ($0.31 versus $0.68) despite better than expected revenue (S1.28 billion versus $1.23 billion).

The company also announced it was suspending its hefty dividend, which was nearly 20 percent before it was discontinued. The double whammy of sorts resulted in the worst performance in years for the issue. Shares closed Friday at $14.66.

The primary reason for such an issue paying such a high-dividend is directly correlated to its declining price. The lower an issue plummets in price, the corresponding yield automatically increases if the dividend is not lowered as well. Therefore, if an issue pays an above average dividend, one may want to explore the reason for the price decline before purchasing the issue.

Related Link: This Was No Thanksgiving For OPEC

Dangers Of Buying Above-Average Dividend Paying Stocks

The danger of buying a high-dividend stock is twofold. If the company cannot make enough money to maintain the dividend, it may be cut or eliminated altogether. That action will instigate the dumping of the shares and losses on the principal to boot. No better of this taking place is the drubbing of Seadrill shares that took place beginning Wednesday morning.

For confirmation of this trend, observe the list of highest-paying stocks and funds.

Technical Take

From a technical perspective, Seadrill has been under constant selling pressure since it peaked on August 19 ($37.79). This coincides with recent decline in crude oil prices, which is partially to blame for its cascading price.

Seadrill is trading at levels not seen since September 2009, when it bottomed at $16.35, before making its way to the all-time high made in September 2013 ($48.09).

Wall Street's View

For the most part, Wall Street analysts have guided investors expectations lower and lower, but are still above its current level. The most recent rating change came on October 8 from Bank Of America, who maintained a Neutral rating but lowered the price target to $26.00.

Of the U.S. analysts that follow the issue, Evercore Partners has the Street low price target at $20.00, which is where it was trading until Wednesday's debacle.

Not All Bad News

The company did announce a buyback of up to 10 percent of its outstanding shares. Thus, there should be some added buying interest in the issue as they patiently repurchases shares. That combined with shorts bringing in their gains may help Seadrill build a foundation from which it can recover from.

However, a snap-back rally may be difficult as there are many shareholders stuck at much higher prices that are waiting for a rally to exit.

Latest Ratings for SDRL

Jul 2016Morgan StanleyDowngradesOverweightEqual-Weight
Jan 2016Morgan StanleyDowngradesOverweightEqual-Weight
Jan 2016Bank of AmericaDowngradesNeutralUnderperform

View More Analyst Ratings for SDRL
View the Latest Analyst Ratings

Posted-In: Technicals Movers & Shakers Analyst Ratings Trading Ideas General Best of Benzinga


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