Valuation And Dividend Safety Analysis: Exxon Mobil (XOM)

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Exxon Mobil Corp (NYSE:XOM) is one of the premier oil majors in the world. The company’s integrated operations give it scale advantages. Demand and oil prices are currently high, and XOM will likely have a great year. This point is a significant turnaround from the challenges during the pandemic. XOM has a 4%+ dividend yield. The company is a Dividend Aristocrat and Dividend Champion with 40 years of annual increases, making it a favorite for investors following a dividend growth strategy. The stock is undervalued at a price-to-earnings ratio of about 8.1X. XOM is a long-term buy.

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Overview Of Exxon Mobil

Exxon Mobil traces its history to 1870 and is an offspring of Standard Oil. The company merged with Mobil in 1999 and renamed itself Exxon Mobil. In 2009, the oil giant acquired XTO Energy for $41 billion.

Today, XOM is one of the world's largest integrated oil majors. The company has three operating segments: Upstream, Downstream, and Chemical. XOM explores and produces, transports, and refines oil and natural gas. Total reserves were around 18.5 billion barrels of oil equivalent (bpoe) at the end of 2021. The company is also the world's largest refiner, with a capacity of 4.6 million barrels per day. Additionally, XOM is a leading commodity and specialty chemical producer.

Total revenue was about $276,692 million in fiscal 2021 and $306,8734 million in the past 12 months. Exxon Mobil has a market capitalization of ~$360.82 billion.

Selected Data For Exxon Mobil (NYSE)

Ticker XOM
Market Cap $360.82 billion
Stock Price $87.55
Dividend (FWD) $3.52
Dividend Yield 4.02%
P/E Ratio (FWD) 8.1

Source: Data from Portfolio Insight (as of July 3, 2022)

XOM's Dividend And Dividend Safety

XOM is a Dividend Aristocrat and Dividend Champion with 40 years of annual increases. In addition, XOM is one of the companies with the longest dividend streaks dating back to 1882. Although, low free cash flow (FCF) and negative earnings during the pandemic combined with too much debt forced the company to hold the quarterly dividend rate constant from Q2 2019 to Q4 2021. The company maintained its annual streak by timing the quarterly dividend increases.

The forward dividend rate is $3.52 per share, giving a forward dividend yield of ~4.02%. This value is less than the trailing 5-year average of 5.38%. In addition, the dividend yield is about triple the average of the S&P 500 Index.

The company's last quarterly dividend increase was roughly 1% to $0.88 per share from $0.87 per share in October 2021. However, the dividend growth rate is slowing and has been 3.21% CAGR in the past five years and 6.55% CAGR in the past ten years. According to the Chowder Rule, this gives a Chowder Number (CDN) of 7.15%.

Additionally, XOM has excellent dividend safety metrics from the perspective of earnings, FCF, and debt.

From an earnings perspective, the forward payout ratio is about 32% based on an annual dividend of $3.52 per share and estimated diluted non-GAAP earnings per share of $10.86 in 2022. Our target percentage for payout ratio is 65% suggesting the company’s dividend is safe. However, investors should be aware that XOM's earnings per share are dependent on oil and natural gas prices, and thus the payout ratio can fluctuate. For example, it was higher from 2020 to 2021 when oil prices were low.

The dividend is also safe from the standpoint of FCF. In the LTM, FCF was about $40,066 million. The dividend required $14,964 million, giving a dividend-to-FCF ratio of approximately 37%. This percentage is well below our cutoff percentage of 70%, suggesting the dividend is safe.

Oil majors tend to carry a lot of debt, and XOM is no exception. However, total and net debt is declining after a significant increase in 2020 during the pandemic. At the end of Q1 2022, XOM had ~$11,074 million in cash, cash equivalents, and short-term investments. There was $4,886 million in short-term debt, and long-term debt was $42,651 million. However, debt is not a risk for the dividend with a leverage ratio of 0.6X and interest coverage of more than 48X supported by high EBITDA and FCF.

Furthermore, XOM has a high-grade investment rating of AA- /Aaa2, and thus debt is not a concern for dividend safety.

Competitive Advantage, Risks, And Valuation

Scale is one of XOM's competitive advantages. This fact translates to cost and operating efficiencies. In general, oil and natural gas exploration is a risky business by nature. Not all wells will be successful and significant capital is required to explore deep water and remote areas of the world. Similarly, refineries are expensive to build and maintain and require billions of dollars. As a result, only large, well-capitalized energy companies can afford to undertake oil and and natural gas exploration and refining.

Next, XOM has significant reserves that total roughly 11 years of production. The company is successfully adding reserves in waters off Guyana and in the Permian Basin. The oil major is diversified, too, with operations around the globe.

XOM has environmental risks related to spills and emissions, which are a part of regular operations. Both may result in fines and reputational damage. Volatile oil and natural gas prices are primary threats to revenue and earnings. The period from 2020 to 2022 has shown how quickly prices can decline and recover and affect the fortunes of oil majors.

XOM is undervalued based on average valuation in the past decade. At the current stock price, the company trades at a forward PE ratio of about 8.1X, below the multiple in the past decade of 9.2X to 19.5X, suggesting XOM is undervalued. However, the dividend yield is lower than the trailing 5-year average.

That said, the combination of market leadership, a growing dividend, dividend safety, and undervaluation makes XOM a long-term buy.

Disclosure: None.

Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money. 

About the Author

The author is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, InvestorPlace, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.0% and 100 (81 out of over 9,459) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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