Few companies match the dividend history of Exxon Mobil Corporation ( NYSE: XOM ). The energy giant has been one of the most prominent American oil and gas exploration companies and a rightful heir to John D. Rockefeller’s Standard Oil.
Over the decades, it grew famous for stable dividend payouts, belonging to a group of dividend aristocrats, companies that have increased their dividends for at least 25 years straight.
Oil has always been a volatile commodity, but this reached a new dimension through the last year and a half - swinging from the multi-decade low, first-ever negative price for the futures, back to the multi-year high. Oil above $70 is music to the shareholder’s ears as Exxon has extensive operations in Permian Basin, targeting the production at $15 / barrel breakeven operation, as well as a $25 / barrel production in Guyana - prices rarely seen outside of the Middle East. Most of the US producers need $35-45 oil to keep the production on.
With Exxon Mobil yielding 5.5% and having paid a dividend for several decades, many investors find the company quite interesting. It is not surprising that many buy it for dividends. Some simple analysis can offer many insights when buying a company for its dividend, and we'll go through this below.
NYSE: XOM Historic Dividend July 6th, 2021
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While Exxon Mobil pays a dividend, it was loss-making during the past year. Although the oil crash of 2020 was an exceptional situation, when a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Exxon Mobil paid out 379% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Yet, 2020 was an exception, and Exxon reached into its balance sheet to support the dividend investors’ expectations. Debt-to-equity peaked at 0.4 but has since declined to 0.38.
Remember, you can always get a snapshot of Exxon Mobil's latest financial position by checking our visualization of its financial health .
Before buying a stock for its income, we want to see if the dividends have been stable in the past and if the company has a track record of maintaining its dividend. For this article, we only scrutinize the last decade of Exxon Mobil's dividend payments. During this period, the dividend has been stable, implying the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was US$1.8 in 2011, compared to US$3.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.1% a year over that time.
Businesses that can grow their dividends at a decent rate and maintain a stable payout can generate substantial wealth for shareholders over the long term.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice to grow earnings per share (EPS). This is essential to maintaining the dividend's purchasing power over the long term. Exxon Mobil's EPS have fallen by approximately 23% per year during the past five years. Yet, this is significantly skewed by the Black Swan event of 2020 and cannot be reliable.
Even through the turbulent last year, when oil futures went below 0 for the first time in history, and the sector suffered losses — Exxon Mobil stood by its investors. They didn’t cut the dividend even when the yield went over 10% and the company was unprofitable at the time.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend can grow. Exxon Mobil's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have shrunk, but at least the dividends have been relatively stable.
While heavily influenced by the oil price crash, the oil price has now recovered to a 5-year high, but the stock price is yet to recover fully. However, the company keeps pushing forward, cutting the expenses, focusing on the core business, and outperforming its peers.
As long as it stays this way, it is likely that the dividend will remain one of the strong reasons to have it in your portfolio.
Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Exxon Mobil that investors should consider.
We have also put together a list of global stocks with a market capitalization above $1bn and yielding more than 3%.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.