Exxon Mobil Corporation (NYSE:XOM) stock is risky and a binary bet on oil. Exxon’s dividend is not worth the risk coming from renewable. The stock is thus overpriced to take a bet alongside big oil.
XOM Stock Price Analysis – Is Exxon stock a risky and a binary bet on oil?
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring investors exit long-short hedge funds, the oil market is now "broken", and Haidar Capital surges 225%. Q2 2022 hedge fund letters, conferences and more
Good day fellow investors as promised, today want to discuss Exxon. It is a binary bet on oil. What will happen with all will there be growing demand over the next 10-20 years, Or declining demand? That's the answer, we have to get from an investing perspective to put the risk and reward into perspective to take that 5% dividend yield that might grow to 7-10 percent if things really developed as Exxon is planning and then put that 5-10 percent into a long term perspective from investing. So can you sleep well and invest in Exxon, that's the question we have to answer.
So let's start with the analysis. And then we'll conclude with the risk reward perspective and whether there is something better. Let's start just before starting. This is what I do. I analyse businesses, I put them into long term perspective, I look at their risk reward. And I write reports on that, if you fancy seeing what I do, seeing all my ideas, all my reports and looking for those investments with less long term risk and positive upside, please check my stock market research platform, when you see my portfolios, all my research, all the sectors that I research and I have been now researching the shipping sector, LNG gas, and Exxon is one part that I have to research to get a better perspective on the whole environment. What's the outlook? What are the risks and rewards?
Let's start with Exxon. So let's start with the analysis will discuss Exxon's investment performance over the past years, then Exxon's outlook on the future of oil, Bloomberg's outlook, McKinsey's, let's say objective perspective, what to believe? What is going on with technology? Will oil be disrupted? And in what magnitude and then the risk and reward for Exxon investors. So the stock the real world? Well, over the past 50 years, bad performance has been choppy over the last 12 years. So there is an indication that something is not going right with Exxon. And the focus a lot have is the 5% dividend yield the 5% dividend yield would cover your investment over 20 years. So that's the perspective when you own Exxon you have to think about 20 years. And I think many are missing what can happen over the next 20 years. And that's what we are going to discuss in the last SEC filing, Exxon disclosed how they expect 50% lower net income in q3 2019 you to lower oil prices. So that is a big, big hit and the stock is to multi year low. So we have to see whether this is the structure issue, long term issue, or it's just a cyclical issue. Like it was the case in 2009 2015. When afterwards, the stock earnings dividends rebounded, so let's dig deeper.
What we have to see is okay, short term, demand for oil has been lower than expected and therefore lower prices, even if Trump is doing whatever he can to keep oil prices higher with the mumbo jumbo in the Middle East. But still, Exxon was the largest company of the s&p 500, just seven years ago, everybody was still betting on oil prices were high. And now it's out of the top 10. It's actually in position 12. Chevron is was also in the top 10. Now it's actually in position 50 or something. So things are changing the market is focusing on other things. And that's something very, very important that we have to also keep in mind. Does the dividend of 5% justify what's going on and what might happen? So let's look deeper. And I think that as investors as individual investors, we have to really the opportunity to focus on this. This is from the 1977 letter to shareholders and Buffett emphasises how one of the lessons the management he has learned, and unfortunately, sometimes real real learned is the importance of being in business where tail winds prevail rather than headwinds. So we always want to invest with tailwinds prevailing because even if you make a mistake, you will do good. Now let's look at the outlooks from Exxon to Bloomberg to McKinsey's on what will happen if we look at Exxon. 75% of their cash flows is and will be spent into capital expenditure. So they're investing and if they do so, they are spending a lot of money, then they must be very, very bullish on oil.