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Is This Energy Sector Dividend Aristocrat Flashing Buy Signals?

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Friday, 09 November 2018 10:38 AM Current | Bio | Archive

Investors looking for high-quality dividend growth stocks should take a closer look at the Dividend Aristocrats, a group of 53 stocks in the S&P 500 Index that have raised their dividends for at least 25 years in a row.

The Dividend Aristocrats are an appropriately named group, as they have achieved royalty status when it comes to dividend growth.

Just over 10% of the S&P 500 currently qualifies as a Dividend Aristocrat, which should come as no surprise. Raising dividends each year for 25+ consecutive years, in good economies and bad, is no small achievement.

Oil and gas major Exxon Mobil Corporation (XOM) is a Dividend Aristocrat, with 35 years of annual dividend hikes under its belt. Even better, Exxon’s share price has languished over the past few years, which has pushed its dividend yield up to 4.0%. In a low interest rate environment, Exxon’s high yield and dividend growth are especially appealing for income investors.

Best-In-Class Sector Leader

Exxon is the largest publicly-traded energy company in the world, with a market capitalization of $352 billion. It is an integrated oil and gas giant, with a huge exploration and production business, along with large refining and chemicals businesses. Exxon produces nearly 4 million barrels of oil equivalents per day, and generated revenue of $237 billion in 2017.

The past few years have been challenging for Exxon, as the price of oil is still well below the peak level of $100 per barrel in 2014. This has depressed Exxon’s revenue and profit, but the good news is that oil prices are rising again. As a result, Exxon’s fundamentals have significantly improved over the course of 2018. For example, last quarter Exxon reported a 25% increase in revenue, to $77 billion. Earnings-per-share of $1.46 rose 57% from the same quarter last year. Higher oil and gas prices gave a huge boost to Exxon’s core upstream segment, which includes the company’s exploration and production businesses.

Not only is Exxon the largest publicly-traded oil and gas company, it is also in the best financial condition. It has a credit rating of AA+ from Standard & Poor’s and Aaa from Moody’s, the two major credit ratings agencies. Exxon’s credit ratings are higher than those of its closest industry peers, such as Chevron (AA-/Aa2), Royal Dutch Shell (A+, Aa2), and BP (A-/A1). This means Exxon enjoys more favorable terms when it raises capital to fund new projects. Keeping its cost of capital low leaves more cash flow left over to invest in growth, buy back stock, or pay dividends.

Financial Strength Fuels Shareholder Distributions

Exxon generated $30.6 billion of cash flow from operations and asset sales over the first three quarters of 2018. Such a huge amount of cash flow allows the company to invest in capital expenditures, maintain a healthy balance sheet, and reward shareholders with steady dividends. Exxon has a current annual dividend of $3.28 per share. With expected earnings-per-share of $4.91 for 2018, Exxon has a 2018 dividend payout ratio of 67%. In other words, the company is currently distributing around two-third of its annual earnings, which indicates a secure dividend payout.

Exxon’s dividend provides a 4.0% dividend yield, which is more than double the average dividend yield in the S&P 500 Index. Exxon is a high-yield stock, particularly since interest rates remain low. Even better, Exxon is likely to continue raising its dividend each year. Exxon raised its dividend by 6.5% in 2018, with another raise highly likely next year and beyond. The company has a modest payout ratio which leaves room for future dividend growth.

Final Thoughts

The oil and gas industry is highly cyclical, owing to the volatile swings of commodity prices in any given year. This is largely why Exxon and Chevron are the only two energy stocks on the list of Dividend Aristocrats. With over 30 consecutive years of dividend increases, a high yield of 4.0%, and an industry-leading balance sheet, Exxon should be considered a blue-chip oil stock.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
 

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BenReynolds
The oil and gas industry is highly cyclical, owing to the volatile swings of commodity prices in any given year. This is largely why Exxon and Chevron are the only two energy stocks on the list of Dividend Aristocrats.
exxon, mobil, dividend, buy
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2018-38-09
Friday, 09 November 2018 10:38 AM
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