Dividend Aristocrats

Exxon Mobil Stock, a 37 Year Dividend Aristocrat

Exxon Mobil Stock is one of 2 oil and gas stocks in the S&P 500 Dividend Aristocrats group. Dividend Aristocrats are stocks that have raised dividends for a minimum 25 consecutive years without missing even one.

Oil and gas is a “boom and bust” industry that is highly reliant on oil and commodity prices. On a day to day basis, commodity prices fluctuate heavily thanks to various factors including the US Dollar, geopolitical tensions, supply and demand as well as politics.

Thus, it is a great achievement for Exxon Mobil to be able to weather cyclical economic downturns and grow its dividend for the 37th consecutive year in 2019. Management grew dividend by 6.2%; from $3.23 in 2018 to $3.43 in 2019.

In this article, we provide a synopsis of Exxon Mobil’s operations and financial statements, inspect dividend growth history and compare its performance and valuation to that of the S&P 500.

Right off the bat, Exxon Mobil Stock yields a 4.9% dividend, close to a definition of “high dividend yield stock.”

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Exxon Mobil was born through the merger of Exxon (Standard Oil founded by John D. Rockefeller in 1870) and Mobil (Standard Oil Company of New York) in 1999. Exxon Mobil is involved in exploration, production and transportation of oil and natural gas products. It operates in Upstream, Downstream and Chemicals segments.

Upstream refers to the process of identifying oil deposits, drilling wells and recovering raw oil from the ground.

Downstream refers to oil and gas products sold to end consumers in retail gas stations. This primarily refers to refiners of crude oil and natural gas.

Investopedia has a useful article that goes in depth on the differences between upstream and downstream in oil and gas industry.

Exxon Mobil is planning to significantly increase upstream production of crude oil and liquids after multiple discoveries in Guyana raised total recoverable resources to more than 5 billion barrels of oil equivalent.

Exxon Mobil Production Outlook

Production in Guyana is slated to begin in 2020. In other developments, the company acquired 2.3 million acres of land holdings in Brazil’s pre-salt basins and production is expected to begin in 2020.

The company continues acquisition of high-quality land in Permian Basin in Texas and New Mexico to capitalize on low-cost production.

In fact, it only takes crude oil price of $35 per barrel to be profitable in this region. Exxon Mobil is also adding low-cost production of liquefied natural gas in Papua New Guinea and Mozambique.

Revenue Analytics & Share Buybacks

For 2018, Exxon Mobil generated total revenues of $279.33 billion and earned a net profit of $20.84 billion, implying a profit margin of 7.5%. Revenue grew 17.8% year over year from 2017’s total of $237.16 billion.

Trading on the New York Stock Exchange, Exxon Mobil Stock has a $290 billion market capitalization and pays a handsome 4.9% dividend.

Over the last decade, Exxon Mobil’s net income has dropped from $30.46 billion in 2010 to $20.84 billion in 2019. The reason for this decline is in 2010, Crude Oil was trading as high as $115 while in 2019, the price has traded in the $50 to $60 per barrel range.

Upstream is the largest business generating $14.07 billion in net income for 2018. The company produced an average of 2.266 million barrels of crude oil and liquids per day, a 0.7% decline from 2017’s total of 2.283 million barrels per day.

Upstream segment also produced an average 9.4 billion cubic feet of natural gas liquids per day, down 8% year over year.

The company operates 44 rigs in the Permian Basin and is planning to increase this to over 50 by 2024.

Management has provided an outlook for earnings growing by $4 billion in 2020 with a $40 per barrel crude oil price. By 2025, it is expecting a cumulative earnings increase of $9 billion thanks to higher output from Permian Basin.

Management Guidance for 2020 to 2025 Exxon Mobil

Growth Outlook

In 3rd Quarter, 2019 earnings results, Exxon Mobil announced total revenues of $65.04 billion, and net income of $3.17 billion, a 49% year over year drop from $6.24 billion in 2018. Revenues in 3rd quarter 2018 were $76.6 billion.

The reason for the decline as stated by management is “lower liquids and gas realizations.” What this means is the price of oil equivalent liquids dropped harshly leading to a steep earnings decline.

In 3rd quarter 2018, the price of West Texas Intermediate Crude traded as high as $76. By 3rd quarter of 2019, the price dropped to as low as $51, which explains the large earnings decline in Upstream operations of Exxon Mobil.

Exxon 3Q 2019 Earnings Results

On the bright side, upstream liquids production increased 5% year over year driven mainly by the Permian Basin. In fact, production of oil equivalents increased to 3.9 million barrels per day, up 3% from 3rd quarter, 2018.

In a press release dated March 5th, 2019, Exxon announced it is planning to accelerate oil production in the Permian Basin to 1 million barrels of oil per day by 2024. Total reserves of oil owned by Exxon in this region are up to 10 billion barrels.

According to the Energy Information Administration, the United States is the largest oil producer in the world pumping 12.1 million barrels of oil per day. Permian Basin accounts for almost half of this production, totaling 5 million barrels of per day.

Management is fine tuning its oil assets to focus on projects that deliver high returns, in excess of 20% annually. By the end of 2021, the company expects to divest or sell about $15 billion in assets including sale of non-operated upstream assets in Norway to Var Energi AS. The transaction includes 20 oil fields producing an equivalent of 150,000 barrels of crude per day.

As mentioned above, Exxon’s operations in the Permian Basin are very profitable and have low break even cost. Management intends to divest high cost projects with low returns in exchange for low cost projects with high returns.

Management is also very bullish on long term demand for energy and oil-equivalent products such that it expects Upstream operations to double earnings from $10 billion in 2019 to as much as $20 billion by 2025. Attached screenshot is from Exxon’s Outlook for Energy: A View to 2040 report.

Exxon Mobil Upstream Assets Growth

Dividend Growth History

Exxon Mobil is a member of the prestigious S&P 500 Dividend Aristocrats group because it has raised its dividends consistently for 37 years in a row. This is a superb achievement due to the nature of the boom and bust oil and gas industry the company operates in.

With dividend data available from its Investor Relations website, Exxon Mobil has increased its dividend from $0.61 per share in 1990 to $3.43 as of 2019. This is a compounded annual growth rate (CAGR) of almost 6%, which is very respectable for this industry.

Attached chart shows the steady uptrend in Exxon Mobil’s dividend payment to investors.

Exxon Mobil (XOM) Dividend History

Below chart shows the annual year over year increased in Exxon Mobil’s dividend. We can concur that during the boom times of 2013 to 2014 when West Texas Intermediate Crude traded north of $100, Exxon grew its dividend by 17% and 13% annually. However during the oil price crash of 2016, management did not cut its dividend but just lowered its growth rate to low single digits.

Dividend Payout Ratio

Lets examine the the dividend payout ratio for Exxon Mobil Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 annual report, the company states cash from operations equals $36 billion while capital expenses totaled $16.45 billion.

Free Cash Flow = Cash from Operations – Capital Expenditures

= $36 billion – $16.45 billion

Free Cash Flow = $19.56 billion

Dividends Paid in 2018 = $13.79 billion

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $13.79 billion / $19.56 billion

Dividend Payout Ratio = 70%

A dividend payout ratio of 70% is healthy for a company like Exxon Mobil due to a requirement of consistently investing in large projects to increase oil production.

We think management has maintained its capital structure very well with a focus to grow oil production by investing capital and grow dividends paid to shareholders.

Valuation and Long Term Performance

Exxon Mobil’s stock has risen in price from $13 in January 1990 to $68.5 as of January 2020. This represents a compounded annual growth rate of 5.7%. This has under performed the S&P 500 that has yielded a compounded annual growth rate (CAGR) of 7.8% in the same time period, excluding dividends.

During the great financial crisis of 2008, Exxon’s stock dropped from as high as $96 in May 2008 to as low as $56 in June 2010, representing a cumulative drop of 40%. This drop was actually less than the dropped experienced by the S&P 500 index which decline 56% in total.

XOM Long Term Chart

Executive Summary

Here is what we like and don’t like about Exxon Mobil Stock.

Likes

  • Consistent dividend growth for 37 years, making this a Dividend Aristocrat.
  • 5% dividend growth rate over the last 5 years; which is pretty strong for the oil and gas industry given the turbulent oil price.

Dislikes

  • Dividend payout ratio of almost 70% which is at the higher end of the range.
  • A valuation premium to the S&P 500. Trades at 28.3 times forward earnings while the S&P 500 trades at 18.5 times.
  • Negative earnings per share growth over the last 5 years due to turbulent oil prices.
  • Boom and bust cycle; large share price drops due to fall of commodity prices.
Market Capitalization $290 Billion
Dividend Yield 5.1%
Forward PE Ratio 28.3 times earnings
Dividend Growth (5 Year Avg.) 4.9%
Dividend Payout Ratio 70%
EPS Growth (5 Year Avg.) -8%
2018 Revenues $279.33
Gross Margin 29.4%
Net Margin 7%

 

 

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