Tags: exxon mobil | dividends | oil | energy

Exxon Mobil: A Dividend Champion With High Potential Returns

Exxon Mobil: A Dividend Champion With High Potential Returns
Piotr Swat/Dreamstime

By Thursday, 07 January 2021 02:59 PM Current | Bio | Archive

Companies that are able to raise dividends over long periods of time have shown strength over the ups and downs of the economic cycle. Companies with more than 25 consecutive years of dividend growth have proven themselves to be especially resistant to economic downturns.

This is a feat that isn’t easily accomplished. In fact, there are only ~140 companies in the entire market that have at least a quarter century of dividend growth. We feel that these Dividend Champions are an excellent place for income investors to find high-quality dividend stocks.

One name we feel that could produce excellent returns over the next five years is Exxon Mobil Corporation (XOM).

Business Overview

With a market capitalization of approximately $175 billion, Exxon is one of the largest energy companies in the world. The company has a diversified business model with upstream, downstream and chemicals all contributing to results. Exxon Mobil generated revenue in excess of $202 billion over the last 12 months.

Exxon has struggled over the last year as shares have fallen more than 40% as energy demand was severely weakened due to the COVID-19 pandemic. That being said, Exxon has the size and scale that most of its peers do not. This should allow it to withstand challenges.

The company has also taken steps to control costs, such as cutting capital expenses by 30% in 2020. Exxon is also delaying investment in its Permian Basin and Guyana projects in addition to reducing its global workforce by 15%. Exxon will also divest several non-core assets which will result in a non-cash charge of $20 billion in the fourth quarter of 2020.

Still, the long-term prospects for energy remains strong. The company forecasts that the world will need a new supply of 550 billion barrels of oil and 2,100 trillion cubic feet of natural gas through 2040. Exxon should be able to capitalize on this demand due to its size. The company intends to invest in existing projects as well as new ones in order to increase its current oil production 25% to 5.0 million barrels per day by 2025.

Dividend Analysis

The near-term outlook appears challenged, but Exxon has managed to grow its dividend for 38 consecutive years over several periods of uncertainty regarding energy prices. It should be noted that Exxon did not raise its dividend in 2020 and has now distributed the same payout to shareholders for the past seven quarters. A raise any time in 2021 would preserve the company’s dividend growth streak.

A lack of an increase last year isn’t surprising considering that Exxon has produced negative free cash flow over the last year. This means that the company has had to cut spending and take on debt in order to fund its dividend payments. Total debt stood at nearly $69 billion at the end of the third quarter compared to $42 billion of debt at the end of 2019. Investors will want to monitor this situation going forward as Exxon surely needs higher energy prices in order to continue funding its dividend.

Even without a raise, shares of Exxon currently yield 8.4%. This is significantly better than the average yield of 1.6% for the S&P 500 index. Earnings growth and expansion of the valuation multiple, will also add to future shareholder returns. We believe that an eventual recovery from the COVID-19 pandemic will lead to an 8% earnings growth rate through 2025 off of mid-cycle (five-year average) earnings-per-share of $3.26.

Using this estimate and a recent share price of ~$41.50, Exxon trades with a price-to-earnings ratio of 12.7. This is a slight discount to our 2025 target price-to-earnings ratio of 13. Valuation could add 0.5% to annual returns over the next five years.

Annual returns would consist of the following:

  • 8% earnings growth
  • 8.4% dividend yield
  • 0.5% valuation reversion

In total, investors could see returns of 16.9% annually through 2025.

Final Thoughts

The energy sector in general remains a difficult place to invest due to the uncertainty regarding demand due to the COVID-19 pandemic. However, energy demand is expected to be very high over the next two decades. With its massive size and key projects, Exxon has the potential to continue to be a leader in this sector.

The company’s balance sheet has had to absorb additional debt in order to fund the dividend, but Exxon has managed to overcome short-term challenges before.

Investors willing to believe in the long-term story for the energy sector in general and Exxon specifically could see nearly 17% in annual returns from the stock over the next five years.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

 

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BobCiura
Companies that are able to raise dividends over long periods of time have shown strength over the ups and downs of the economic cycle. Companies with more than 25 consecutive years of dividend growth have proven themselves to be especially resistant to economic...
exxon mobil, dividends, oil, energy
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2021-59-07
Thursday, 07 January 2021 02:59 PM
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