Deep Drilling for Dividend Stocks: Is SeaDrill Still Undervalued?

New week, same dilemma - finding undervalued dividend stocks in this latest rally. This rally has seen the prices of many dividend paying stocks run up quite a bit.

Is a stock still undervalued when it's risen over 41% year to date, like SeaDrill (SDRL)? When you look at a stock's PEG ratio, (P/E divided by EPS Growth), the only thing that can counteract a rising "P" (Price), is strong EPS growth.

With that in mind, we looked at SeaDrill's various PEG's:

Since it has a 7% dividend yield, we've added SDRL this week to our High Dividend Stocks By Sector Tables, (in the Energy Section).

Some firms in this industry have some wildly divergent numbers, which tend to skew the overall average, but, based upon the past and future PEGs, and its P/Book and P/Sales numbers, SDRL looks more undervalued than its peers. It's interesting to note, that the whole industry has a very low next year PEG of .47, which is probably due to the BP oil spill fallout.

Here are selected financial metrics for SDRL:

Again, SDRL's numbers are better than its peers, with the exception of Debt/Equity. One of the main reasons for their heavier debt load is that SDRL has invested heavily in modern, state-of-the-art deepwater drilling rigs, which, in turn, command a premium day rate, in these days of harder to find oil.

If you're looking for a way to further juice SDRL's dividend yield, selling covered calls offers an interesting additional premium (click to enlarge images):

In addition to the $3.45 in dividends and call premiums, you might also receive an additional $.88 in price gain, (the difference between the $34.12 stock price and the $35.00 Call Strike price), if your shares are assigned. This would equal a total potential gain of $4.33/share, or 12.7% nominal yield, (23.60% annualized).

(We've added SDRL to our Covered Calls Table this week, where there are more details.)

If you're leery of SDRL's current price, you could achieve a lower entry point, and get paid to do it, by selling Cash Secured Puts:

The first of these put option trades is the more conservative one, which gives you a lower break-even point, which is closer to SDRL's current 50-day avg., but it has a lower yield than the second trade, which is more bullish. You can find more details about this and other put options trades, in our Cash Secured Puts Table.

Company Overview: SeaDrill is a leading offshore deepwater drilling company, with a fleet of 54 units for operations in shallow to ultra-deepwater areas in harsh environment and benign environments, and operates in 15 countries on four continents.

Disclosure: Author is short SDRL puts.