Why Exxon’s Dividend Is Safe and Attractive

Dividend Stocks

Exxon (NYSE:XOM) has made it clear that it plans on maintaining its dividend. That makes Exxon Mobil stock very attractive with its 7.7% dividend yield.

Exxon Mobil is a Classic Yield Trap That May Not Last Much Longer

Source: Harry Green / Shutterstock.com

I have written several articles about this, including the most recent one on May 12: “Exxon’s Safe Dividend Makes XOM Stock Very Attractive.” Since then, Exxon Mobil stock has been more or less flat.

The point is that management has made maintaining the dividend a very clear priority. They have broadcast this in several ways. For example, on page 2 of its Q1 quarterly report, Exxon said,

“The company’s objective is to continue investing in industry-advantaged projects to create value, preserve cash for the dividend, and make appropriate use of its balance sheet.”

How Management Will Preserve the Dividend

Moreover, Exxon’s management announced on May 1 that it was reducing its capex spending by 30% and cash operating expenses by 15%. This will be more than enough to cover the quarterly dividend payments

For example, since its Q1 quarterly capex was $7.145 billion, as seen on page 14 of its earnings release, the 30% savings will be $2.144 billion. In addition, since cash operating expenses were $9.968 billion, a 15% cut from this will bring in $1.495 billion. In total, the savings will be $3.639 billion.

Compare that to the quarterly cost of the dividend, which was $3.719 billion in Q1. So the estimated savings will almost completely cover that.

This assumes that the price of oil stays level with Q1. So far, in Q2 the price of oil has been slightly higher than Q1. Moreover, as economic activity picks up, the demand for oil and gas will rise, pushing up the price.

Exxon’s CEO Darren Woods has made it clear in his interviews on TV that he has no plans to cut the dividend. Take a look, for instance, at this interview in early April on CNBC. Since then, Exxon increased its cuts to capex to preserve the dividend.

Moreover, the company is apparently making good on its measure to cut expenses, based on a Bloomberg report on June 26. The article said that Exxon is looking to cut between 5% and 10% of U.S. jobs, based on performance-based reviews. The sources for the article said these were not lay-offs but they will result in the same action.

Will the Exxon Mobil Stock Dividend Rise?

If you look at Exxon’s dividend history, you see that it normally raises the quarterly dividend after every four quarters. However, in the latest dividend declared on April 29, the company kept the dividend level at 87 cents per share. This was the fifth quarterly dividend at this level.

The only thing the company said about this was, “This second quarter dividend is at the same level as the dividend paid in the first quarter of 2020.” So, there is nothing in Exxon’s present policy that excludes it from raising the dividend. The company is being conservative and has now maintained the dividend at the same level.

Moreover, at the company’s annual meeting on May 27, Woods, was specifically asked about the dividend. He responded by saying that the company would “maintain” the dividend. The board assesses each quarter its ability to pay a “reliable and growing” dividend.

What to Do With Exxon Mobil Stock

Therefore, I suspect that once economic growth returns and the price of oil and gas starts to rise, you will see an increase in the dividend. Until then, we can estimate what the value of XOM stock will be.

For example, according to Seeking Alpha, the dividend yield over the past four years has been 4.53%. Using this as a guide, we can derive a target price. Dividing the annual dividend of $3.48 per share by the average historical yield of 4.53% brings a target price of $76.82 per share.

That represents a potential 76.1% gain over the next several years as the dividend yield falls by the price rising. Let’s say that it takes 2.5 years to happen. This still represents a 25.4% compounded rate of return each year over that period.

Combined with the annual yield of 7.7% in the first year, the total “expected” return will be 33.1% in year one. There is no guarantee, but the term “expected” refers to the mathematical probability expectation.

In year two the 25.4% plus the now lower dividend yield of 6.1% brings in a total expected return of 31.5% in year two. These are very good returns for most investors.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

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