By Bob Ciura of Sure DividendAt Sure Dividend, we are big fans of investing in strong dividend stocks over the long run. In our view, buy-and-hold investors should consider the Dividend Aristocrats, a group of 64 stocks in the S&P 500 Index with at least 25 consecutive years of dividend increases.
The Dividend Aristocrats have a number of shared qualities that make them excellent long-term investments. They widely have growth potential, pay high dividend yields, and generate consistent cash flow each year. The Dividend Aristocrats even have the ability to continue raising dividends in a recession.
The best investment opportunities arise when high-quality dividend growth stocks become undervalued. For this reason, we see Exxon Mobil (XOM) as a long-term buy for dividend growth investors. Exxon Mobil is a high-dividend stock with a 5.7% yield, and it has increased its dividend for over 30 consecutive years. The company has struggled against weak commodity prices in recent years, but we believe it will continue to increase its dividend for many years.
Business Overview and Growth Catalysts
Exxon Mobil is a global oil and gas super-major, with a market capitalization of $253 billion. It is an integrated company, with a portfolio of upstream exploration and production, downstream refining, and chemicals businesses.
2019 was a highly difficult year for Exxon Mobil and the broader energy sector. Weak commodity prices and a 20% increase in capital expenditures caused earnings-per-share to decline by 31% in 2019. Net earnings also declined 31% for the year, to $14.3 billion.
Source: Earnings Slides
But on the positive side, Exxon Mobil is seeing significant growth from two key areas—the Permian Basin and in Guyana. These two areas represent the company’s most attractive growth catalysts.
First, the Permian Basin is one of the highest-quality oil fields in the United States. Exxon is realizing significant liquids growth there. In the most recent quarter, Permian unconventional production increased 54% from the same quarter last year.
In Guyana, last year Exxon started oil production from the Liza field. Gross production from Liza Phase 1 is expected to reach 120,000 barrels of oil per day over the next few months, while a second floating production vessel currently under construction has expected production capacity of up to 220,000 gross barrels of oil per day.
Source: Earnings Slides
Overall, the potential for Exxon’s Guyana operation is impressive. The company estimates recoverable resources offshore Guyana will exceed 8 billion oil-equivalent barrels.
Taken together, Exxon’s new projects will allow the company to increase production—and therefore cash flow—even if underlying commodity prices remain flat. And, the company could simultaneously benefit from lower capital expenditure requirements, as these projects come on-line.
We believe a combination of higher oil and gas prices as well as production growth from new projects, will result in a return to earnings-per-share growth for Exxon Mobil. Earnings-per-share fell to $3.36 in 2019, but we expect a snap-back as new projects will require less spending and also begin to generate cash flow. We expect earnings-per-share will grow 12% per year over the next five years.
In the near-term, asset sales will help the company continue to raise its dividend. In the 2019 fourth quarter, the company completed the previously announced sale of its non-operated upstream assets in Norway for $4.5 billion. More broadly, Exxon plans to divest approximately $15 billion in non-strategic assets by 2021. These asset sales will help free up cash for growth investment and dividends, without having to weaken the company’s excellent balance sheet with debt issuances.
Exxon Mobil has a high dividend yield of 5.7%. It has paid the same dividend rate for the past four declarations. The company typically increases its dividend for the second quarter payment, which means a dividend hike in the coming months is very likely for this Dividend Aristocrat. The dividend yield is currently at a 10-year high and is likely to increase even further with the upcoming dividend raise. As a result, we view this is an opportune time for income investors to consider Exxon Mobil stock.
Exxon Mobil stock has deeply underperformed the S&P 500 for the past several years. But this could be a buying opportunity for long-term investors. The company has a long history of raising its dividend each year, even during the Great Recession and with weak oil prices. The declining share price has elevated the dividend yield to 5.7%, a very attractive yield for a time-tested Dividend Aristocrat.
Disclosure: The author is personally long XOM.
Growth And Dividends From This Dividend Aristocrat
We believe a combination of higher oil and gas prices as well as production growth from new projects, will result in a return to earnings-per-share growth for Exxon Mobil. Earnings-per-share fell to $3.36 in 2019, but we expect a snap-back as new projects will require less spending and also begin to generate cash flow. We expect earnings-per-share will grow 12% per year over the next five years.
In the near-term, asset sales will help the company continue to raise its dividend. In the 2019 fourth quarter, the company completed the previously announced sale of its non-operated upstream assets in Norway for $4.5 billion. More broadly, Exxon plans to divest approximately $15 billion in non-strategic assets by 2021. These asset sales will help free up cash for growth investment and dividends, without having to weaken the company’s excellent balance sheet with debt issuances.
Exxon Mobil has a high dividend yield of 5.7%. It has paid the same dividend rate for the past four declarations. The company typically increases its dividend for the second quarter payment, which means a dividend hike in the coming months is very likely for this Dividend Aristocrat. The dividend yield is currently at a 10-year high and is likely to increase even further with the upcoming dividend raise. As a result, we view this is an opportune time for income investors to consider Exxon Mobil stock.
The Bottom Line
Exxon Mobil stock has deeply underperformed the S&P 500 for the past several years. But this could be a buying opportunity for long-term investors. The company has a long history of raising its dividend each year, even during the Great Recession and with weak oil prices. The declining share price has elevated the dividend yield to 5.7%, a very attractive yield for a time-tested Dividend Aristocrat.
Disclosure: The author is personally long XOM.
and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst.
He received a Bachelor’s degree in Finance from DePaul University and
an MBA with a concentration in Investments from the University of Notre Dame.
Risk is a declining world-wide economy and the increasing use of green energy.
ReplyDeleteIndeed, though XOM and other big energy companies have the capacity to reinvent themselves.
Delete