These are tough times for the oil industry. Oil prices haven’t been this depressed in more than 50 years. In an industry that is already cyclical in nature, the past few years have been a real pain. But Exxon Mobil Corp (NYSE: XOM) has dealt with it admirably.
That’s not to say Exxon Mobil is immune to oil price crashes. Its profitability has suffered but not to the extent of its peers’ earnings. Most of it has to do with the fact that Exxon Mobil is the only industry giant with a fully integrated business. When its upstream segment (oil and gas production) takes a beating, the downstream (refining) and chemicals segments make up for the weakness.
If income investors consider the dividend yields of the oil majors, they won’t be very impressed with Exxon Mobil’s. However, the yield is only part of the investment equation. When you add scale, diversity, balance sheet strength, and dividend growth history, Exxon Mobil is arguably the best stock dividend investors can get in this sector. With the shares now almost back at their 52-week low, it seems like a good time to consider Exxon Mobil.
The Exxon Mobil story
The biggest oil major on the planet started way back in 1870 under the name Standard Oil Co. In 1911, it split into 34 separate companies after a decision passed down by the US Supreme Court. Among these companies were Jersey Standard and Vacuum Oil. The former became Exxon Corporation in 1972, while the latter took on the name Mobil Oil Corporation in 1966. Exxon Mobil Corp came into being through their merger in 1999.
Headquartered in Irving, Texas, Exxon Mobil currently has a market capitalization of about $348 billion. In the latest Fortune 500 list, the company ranks at number four. It finished second in the previous ranking and is currently at its lowest spot since 1999. The decline was due to the sharp drop in revenues and profits last year – 16.7% and 51.5%, respectively. According to Fortune, these were the company’s worst results in a decade.
That said, Exxon Mobil has proved its ability to weather storms. It also has massive proven reserves and can keep pumping for decades. This industry behemoth boasts more than 35,000 gross and more than 29,000 net operated wells across six continents.
With operations in nearly every country on the planet, Exxon Mobil employs close to 73,000 people.
The lowdown on dividends
Exxon Mobil’s dividend history is truly impressive. It becomes all the more so when you consider the industry it operates in. The fluctuations in oil and gas prices have often led to dividend cuts or growth stagnation.
Exxon Mobil has been paying dividends every year since 1911. The distribution has increased for 35 years in a row. Over this uninterrupted growth streak, the payout has risen by 6.4% on average annually.
In April, the company announced that its stockholders would collect a second-quarter dividend of $0.77 per share. This compares to $0.75 per share in the preceding quarter and most of 2016. The dividend yield is currently 3.8%.
The impact of low oil prices on cash flows has given rise to concerns about the dividend coverage. In 2016, Exxon Mobil generated $11 billion in free cash flow. However, dividend payments came to a total of $12.5 billion. What helps the company in these tough times is its ability to raise funds on the debt market. Its strong balance sheet and investment-grade rating put it on a solid footing with creditors. Moreover, Exxon Mobil’s leverage ratio is well below the industry average while its interest coverage ratio is unrivaled. As a result, the company can secure funding at low costs.
The difficulties experienced by the oil industry have affected Exxon Mobil’s share price. Over the past year, its stock has trailed the market by about 25%, trading in the range of $79.26 to $95.55. At the time of writing, the share price is $80.85.
While the trailing P/E ratio of 33.7 is lower than the industry average (37.9), it is significantly higher than the company’s historic values. On a forward basis, its earnings multiple is 19.7, in line with the S&P 500 average, according to Morningstar. What we need to keep in mind is that these ratios become elevated in times of oil price slumps, when earnings take a serious hit.
So, is Exxon Mobil a good buy? In an industry where dividend security is a rare thing, this corporate giant looks like a safe haven. Dividend growth may remain slow for a while. However, Exxon Mobil is well-placed to keep the payments coming and growing. With a track record that screams shareholder commitment, Exxon Mobil would be a solid addition to income-generating portfolios.
I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.
This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.