By Ahmed Ishtiaq
Exxon Mobil (NYSE:XOM) is one of the world's largest integrated oil companies. The company engages in oil and gas exploration, production, supply, transportation and marketing worldwide. In 2011, it reported proved reserves of 24.9 billion barrels of oil equivalent, including its major holdings in oil sands through Imperial Oil. Exxon Mobil's 36 refineries in 20 countries have a throughput capacity of more than 6.2 million barrels per day. The company supplies refined products to more than 25,000 gas stations in 100 countries. Exxon Mobil is also a major petrochemical producer.
Exxon is one of the best dividend paying companies in the market. The company has a concrete history of dividends. At present, Exxon has a dividend yield of 2.56%, and an annual dividend of $2.28 per share. The company has a manageable payout ratio of 48.33% based on free cash flows. Over the past twelve months, Exxon paid cash dividends of $10.07 billion and generated $20.85 billion in free cash flows. The company has been increasing dividend payments on regular intervals. In order to measure the dividend stability of the company, I take a deeper look at the trend in free cash flows and some important metrics.
Free Cash Flows
Depreciation and other noncash charges
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Source: SEC Filings
Over the past three years, the company has experienced an increase in its net income. Especially in 2011 the net income has shown substantial improvement. The same pattern is evident in funds from operations of the company, and the end of 2012 FFO stood at a stunning $60 billion. The cash flows from operations stood at significantly improved levels in 2011 as compared to 2010. Exxon invests heavily in the business, and in the previous three years, the amount of capital expenditures has remained between $26.87 and $32.848 billion. At the end of 2010, the firm spent almost $26.87 billion in capital expenditures; however, by the end of 2012 the capital expenditures for XOM had gone up to $32.848 billion.
The company generates healthy free cash flows. Although, the capital expenditures have been increasing the firm has been able to post impressive free cash flows. Free cash flows have been variable for the company over the past three years. As a result, payout ratio based on free cash flows has also been variable.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
Debt Service coverage
For my analysis, I have used four ratios. The first ratio indicates that the debt of the company is adequately covered with the FFO. The ratio has shown an upward trend over the past three years. It indicates that the firm is generating enough cash flow to cover the long-term debt. The second metric indicates that one of the most important components of the firm is easily covered with the FFO of the company. As I mentioned, capital expenditures are an integral cash outflow for Exxon, and the analysis shows that the firm is able to meet its capital spending requirements through its internally generated funds.
The last two metrics in the table indicate that the firm is able to meet its interest and debt payments sufficiently. Exxon has low levels of debt for an energy company, and the debt levels have remained fairly stable over the past three years. At the end of the last year, the company reported long-term debt of $9.3 billion. Third metrics shows that the interest expense coverage is ridiculously high for the company. Exxon has very low interest expense. The company has not paid more than $300 million in interest expense in any of the past three years. However, total debt service coverage ratio has shown a declining trend over the past three years and currently stands considerably lower than 2010. Nonetheless, the debt service coverage is still incredibly strong for Exxon.
Debt to Equity
Exxon is trading at a slight premium compared to its competitors. However, the company has strong operating and net margin. Furthermore, Exxon demonstrates the best figures for ROE in the group. Debt-to-equity ratio is also better for Exxon than most of its competitors.
I have performed free cash flows analysis on a number of stocks, and this model has been used on different stock operating in different sectors. However, Exxon mobile has produced some of the best results. The company has incredibly strong free cash flows and operating cash flows. Despite dividend distributions of over $10 billion a year, the payout ratio based on free cash flows is less than 50%. A low payout ratio leaves substantial room for an increase in dividends for the company. I believe Exxon is one of the best dividend paying stock that can be added to an income portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestments is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.