This month Halliburton (NYSE:HAL) joined many of its peers in cutting back its dividend payouts significantly. The dividend on Halliburton stock fell from 6.5% to 1.6% as management tried to reel in its spending and batten down the hatches ahead of the economic downturn America is facing.
Dividends weren’t the only thing to go as management found ways to preserve capital. The firm also cut back executive salaries, conducted layoffs, and trimmed employee retirement contributions.
While the drastic measures did safeguard some of Halliburton’s much-needed cash, they also underscore the dire situation the energy company is facing.
Halliburton Stock Doesn’t Have Any Real Catalysts
There’s no question that the energy sector has become increasingly difficult to operate in. Volatile oil prices coupled with an oncoming recession of unknown proportions have made it difficult for oil and gas companies to get a clear picture of the road ahead. Halliburton is no exception, except the firm is carrying around a monumental debt pile that has made the company even more susceptible to economic hardship.
The firm is carrying around a whopping $9.63 billion worth of long-term debt which translates to a debt to equity ratio of 141. That kind of obligation is excessive in the best of times, but with the industry’s future highly uncertain, it’s a huge drawback for investors.
Not only that, but it takes away Halliburton’s ability to pivot and make strategic decisions during the downturn. Companies with strong balance sheets and air-tight operations have the ability to use crises like these to their advantage.
That means the end up coming out the other side stronger. In Halliburton’s case, it seems management is just trying to make it to the other side.
What’s the Point of Owning Halliburton Stock Now?
Halliburton’s dividend cut wasn’t out of the blue— investors have been expecting that sort of move, especially from the energy sector, for weeks. But Barrons’ Avi Salzman made a good point— what’s the point of holding an oil and gas stock that doesn’t pay a hefty dividend?
In an age where big tech and momentum investing has delivered impossible gains via growth stocks, it’s hard to make an argument for oil and gas stocks if you can’t factor in a huge dividend.
Halliburton’s once impressive dividend yield was a comfort to investors. It made waiting through volatility worthwhile and guaranteed income.
Without it, Halliburton stock has very little supporting a buy case.
Overeager Investors Drive Prices Up
Despite the dividend slash, Halliburton stock continued to rise over the past month. The firm’s share price is up roughly 25% since the end of April. Investors are likely cheering oil’s recovery and praising management’s efforts to preserve capital, but the fact remains that Halliburton is on thin ice.
For now, the market is marching ever higher as investors jump on every morsel of good news. The Federal Reserve’s added liquidity has helped boost investor confidence and it seems no amount of disturbing economic data can derail this rally.
That’s dangerous, according to several analysts. Deutsche Bank CEO Christian Sewing cautioned this week that the market hasn’t fully absorbed the impact of the world-wide shutdowns, noting that investors have become overly optimistic.
Yes, markets repriced, but in my personal view the underlying assumption for this recovery are a bit too optimistic
ING Strategists struck a similar tone, noting that investors are too keen to look forward to 2021. They also cautioned that expectations for earnings in 2020 are far too positive.
In uncertain times like these, higher earnings expectations or lower valuations may be needed to keep equity markets supported. We err towards the latter.
The Bottom Line
Despite its recent rally, Halliburton stock has still shed nearly half of its value over the past 5 months.
Much of that was due to uncertainty in the energy sector, some of which has started to evaporate. But betting on HAL now is a risky play considering how much the market has gained.
Buying into Halliburton now offers more risk than reward. The firm is lugging around a huge debt obligation and no longer offers a hefty dividend. Until the future of the US economy becomes more clear, HAL stock simply isn’t worth the gamble.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
