Exxon Mobil (NYSE: XOM) is trading at its lowest level in the last 15 years. And the company has paid and raised its dividend for over 36 years. As a result, its dividend yield has climbed above 7%. This high yield and the reliable history are two of the reasons why I’ve invested in the company. As of Friday February 28th, 2020, it’s a new position that makes up close to 10% of my total portfolio.
Investors have beaten down Exxon’s valuation by over 50% since 2014. But is the company really worth about $200 billion less than it was back then? Sure, the price of oil has dropped and there are other big risks – which I’ll cover below – but I think the potential reward is now worth the risk.
There’s a lot of investing research online but I rarely see people putting their money where their mouth is. With that said, I’ve done a deep dive and tried taking an objective approach. So first, let’s look at the oil and energy industry. Then after, we’ll dig into Exxon’s business and dividend history.
Exxon Mobil Oil Outlook
Exxon Mobil’s core business doesn’t fit into the future. Fossil fuels are going to die. And I’m looking forward to that future. Although, the important question for investors… how long will that take?
Exxon released energy projections for 2040. The company expects global energy demand to rise by 20%. And in most scenarios, Exxon projects that oil and gas will continue to supply more than 50 percent of global energy.
… but is it the owner of a horse farm who said cars are the future?
In most cases, established businesses underestimate disruption. There are high hopes for solar power and other renewable energy growth. Although, progress tends to disappoint in the short-run and surprise in the long-run. With that in mind, I believe Exxon Mobil’s long-term projections are probably too optimistic. And I’ve factored that into my valuation.
Nonetheless, oil will still play an important part of global energy production in 20 years. Exxon will profit along the way and I expect it to continue rewarding shareholders. Its cashflow is volatile in the short-term but should trend up over the next 10 plus years.
The company also has a strong balance sheet and healthy capital allocation…
The Super Supermajor
Of the six supermajors – largest public oil and gas companies – Exxon is the most financially sound. In fact, it had a higher credit rating than the U.S. government. But after a downgrade in 2016, it now has the same AA+ rating as the federal government. That’s surprising considering the government has the power to tax.
A high credit rating allows Exxon to issue cheap debt to finance projects. And it’s selective with its investments. In its Permian operations, Exxon aims to reduce the cost of pumping a barrel of oil to $15. That’s insanely low and only comparable to giant oil fields in the Middle East.
Exxon also started production in Guyana, South America in December 2019. Guyana is expected to have more than eight billion oil-equivalent barrels. Exxon has global reach and this map shows its key projects and output…
Exxon’s scale and financial position make it one of the lowest cost producers. This helps the company weather downturns…
Over the last five years, it’s been tough for oil producers. WTI crude oil has dropped from a price of $100 per barrel to below $50 today. As a result, Exxon’s revenue and operating income have decreased.
This isn’t a great trend for investors but it makes sense with lower oil prices. And I believe it’s already been more than priced into Exxon Mobil’s valuation. Recent economic news has also pushed share price down about 20% in the last few weeks…
The coronavirus is lowering oil demand and prices. And if infections continue to climb, I wouldn’t be surprised to see a full-blown recession. In June 2019, I predicted a high probability of a Stock Market Crash in 2020. That’s looking even more likely and if it happens, oil prices will remain low.
This could lead to a tighter financial situation and another credit downgrade for Exxon Mobil. But other oil producers will struggle even more. This will create great buying opportunities for Exxon. And already, the company is increasing investment while other companies are pulling back.
In 2018, Exxon announced plans to double cash flow from operations by 2025. That’s going to require a lot of new investment and it was based on slightly higher oil prices. As a result, there’s a lot of pushback and investors have beaten down the company’s valuation… but Exxon’s management continues to move forward. If oil prices are higher in the next five to 10 years, they’ll look like geniuses.
Exxon Mobil Dividend History and Safety
Exxon Mobil has a long history of rewarding shareholders – over 36 years of dividend growth. To see the recent trend, let’s look at the last 10 years…
Exxon’s dividend has climbed at a steady rate. And as investors have beaten down the share price, the dividend yield has climbed. At my buy price of $48.85, I locked in a 7.12% yield. That’s well above the average of 4% over the last 10 years.
Now an important question for dividend investors, is the dividend safe?
The payout ratio isn’t looking as good as it has in the past. It’s climbed close to 100% and will likely top that with the oil price drop from the coronavirus. That’s not sustainable in the long-term. Although, management still seems committed to paying bigger dividends each year. And if their cash flow projections come close – and oil prices eventually move up – it shouldn’t be a problem.
So, with my research, I believe a dividend cut is possible in the next few years, but not probable. Even if they cut it in half to maintain reinvestment and keep a healthy debt level, I’d be OK with a 3.56% dividend yield on cost. This is a long-term position and I’m prepared for more short-term volatility.
DRIP Note: I no longer automatically reinvest the dividends. I let my dividends pool up and will buy whatever I find to be the best opportunities every six months to a year. There are no longer trading fees holding me back. Plus, my portfolio has grown.
Final Thoughts on Buying XOM Stock
From a business valuation and dividend standpoint, I think Exxon Mobil is one of the best plays available for the next decade or two. And with this post, I’ve barely scratched the surface of my investment research into the company.
Sure, there are plenty of risks and I’ve touched on the biggest ones above… but I think investors have oversold the stock. The selloff is steep and the risk-to-reward now looks favorable. And of course, a full-blown recession would put even more downward pressure on Exxon Mobil shares. So, there might be even better buying opportunities soon.
Although, I’m happy with my entry price. I might be wrong but with history as a guide and current information, I’d make this same investment again.
P.S. Want to see the other stock I might be buying soon? Exxon was one of two companies on my watch list last month: Dividend Stocks Watch List.