Schlumberger: A Potential 15%-20% Upside From A Dividend Investing Perspective

Schlumberger's (NYSE:SLB) share price has plummeted 31% since reaching its 52-week high of $118 in June 2014 as North American oil producers have been reportedly cutting their capital budgets in light of the oil market turmoil. From a dividend investing perspective, the dip presents a great buying opportunity due to the stock's attractive dividend yield and valuation. In this article, I will walk you through my cash flow and dividend discount valuation analyses that are supportive of the view.

To gauge Schlumberger's capacity for near-term dividend growth, I constructed a cash flow model to predict its free cash flow generation in 2015 and 2016. My model relies on current consensus EBITDA estimates, which expect the metric to decrease to $11.3B in 2015 from $13.8B in 2014 and then recover to $12.5B by 2016 (see chart below). The dip in the 2015 EBITDA is primarily due to an average expectation of about a 25% drop in capital spending from oil producers in North America and about a 15% drop in other international markets.

Source: Seeking Alpha

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