Diamond: High Yield, Deep Water

05/07/2014 7:00 am EST


Jim Powell

Principal Analyst, Global Changes & Opportunities

This offshore drilling company provides worldwide oil and gas drilling services for most of the leading energy firms; I think the stock will be an exceptional long-term performer, forecasts Jim Powell, editor of Global Changes & Opportunities Report.

Diamond Offshore Drilling (DO) has seen lease orders for its deepwater rigs decline over the past year, as an abundance of energy from shale deposits reduced the incentive to drill for more.

However, as I have seen several times in my career, energy never remains cheap very long.

In our energy-hungry world, rising demand always pushes prices up, and suppliers scramble to find more. When that happens, Diamond Offshore sees demand shoot up for its drilling rigs.

Currently, Diamond Offshore is at a low point in its business cycle. Short-term investors have driven the stock down 40% over the past year, from $71.48 to $43.91.

Meanwhile, the price to earnings ratio is now at 12 compared with a p/e of 17.2 for the S&P 500 (SPX). Diamond has also been regularly paying a “special dividend” that gives the stock an impressive 7.3% yield.

Although there is no guarantee that the dividend will remain as high, the company has a good track record for taking care of its shareholders during both good times and bad.

The oil and gas cycle is as close to a sure thing that Wall Street ever offers. Many family fortunes have been made—and will still be made—by investors who specialize in playing the ups and downs of the energy industry.

Currently, some of the biggest buyers of the stock are company insiders, which suggests that the next upturn may not be far away.

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