Why Exxon Should Significantly Increase its Dividend

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 |  Includes: CHK, CLNE, COP, PBR, STO, XOM
by: Michael Fitzsimmons

The following chart displays the ticker symbol, price, yearly dividend, and current yield for a few of the world’s largest oil and gas companies. The data is presented is as of the close on October 8, 2009. Dividend yields were obtained or calculated from online financial service data and/or individual oil company websites. I apologize in advance for any errors.

The companies are sorted from highest to lowest dividend yield.

Company
Stock Symbol
Current Price
Yearly Dividend
Current Yield
BP plc
(NYSE:BP)
$52.76
$3.36
6.37%
Royal Dutch Shell
(NYSE:RDS.A) (ADR)
$57.09
$3.36
5.89%
Total S.A.
(NYSE:TOT) (ADR)
$59.19
$3.24
5.47%
Repsol YPF
(REP) (ADR)
$27.39
$1.46 (2008)
5.33%
StatOil
(NYSE:STO) (ADR)
$23.22
$1.14
4.91%
Eni S.p.A.
(NYSE:E) (ADR)
$50.79
$2.12
4.17%
Conoco Philips
(NYSE:COP)
$51.41
$2.00 *
3.89%
Chevron
(NYSE:CVX)
$71.45
$2.72
3.81%
Exxon Mobil
(NYSE:XOM)
$69.05
$1.68
2.43%
Petrobras
(NYSE:PBR) (ADR)
$47.44
$0.94 (2008)
1.98%
Click to enlarge

*NOTE: COP just announced an increase in the quarterly dividend to $0.50/share.

All companies listed pay dividends quarterly except the following:

Ø Eni S.p.A: paid twice a year; each ADR is worth 2 Eni shares; converted from Euro

Ø StatOil: paid once per year, each ADR Is worth 1 StatOil share; converted from NOK. Statoil’s policy is to pay out 45-50% of consolidated net income through dividends and share buybacks.

Ø Repsol YPF : paid twice per year; each ADR is worth one Repsol share; converted from Euro

Ø Total S.A: paid twice per year; each ADR is worth one Total share; converted from Euro

Several observations are obvious when reviewing this information. First, it is clear European based oil companies pay substantially higher dividends than do its U.S. based peers. All things being equal (production growth, balance sheet, cash flow, etc), this is favorable for investors not only from a higher yield standpoint, but also because the U.S. dollar is experiencing systemic weakness.

Second, it is obvious that Exxon Mobil’s dividend is completely out of step with its peers. The only company paying a smaller dividend is Petrobras. However, I’ll gladly give Petrobras a pass as they are raising and spending billions of dollars to unlock the riches in its deep offshore oil fields. This means shareholders in PBR are going to be rewarded in the near future by much higher production growth rates and therefore higher profits.

On the other hand Exxon Mobil’s production in 2008 actually fell year-over-year in spite of $145/barrel oil prices. Taking these issues into consideration, Exxon Mobil is dead last in terms of dividend yield and rewarding the shareholder. Not only is it last, but its dividend yield is over 1% lower than its nearest peer (Chevron). Exxon Mobil is not even in the game.

Click to enlarge

XOM 1 Year Stock Price Chart

I know, I know…XOM fell much less than the S&P during the recent market carnage and shareholders should be happy with that. And we are. However, XOM is down -13.5% YTD while the rest of the market is rallying and oil is up to $70 from the recent lows in the $40 area. So, that argument doesn’t hold water. The next excuse is “we’ve raised the dividend every year for the last … yada yada yada”. However, when was the last time Exxon significantly raised the dividend yield or paid out a special dividend to its shareholders? Answer: I honestly cannot remember.

Exxon Mobil has arguably the best efficiencies in the business and a pristine balance sheet. They are rock-solid, and a cash and profit generating machine. I read a report awhile back during the “crisis” in which an analyst considered the U.S. government more of a financial risk than Exxon and that its CDS was trading at a discount to U.S. treasuries. I don’t know if there is any truth in that report, but certainly Exxon Mobil can afford a competitive dividend.

So, Exxon Mobil needs to shift a significant portion of the billions in cash it currently has targeted for stock buybacks over to the “dividend” side of the ledger. Conoco Philips increased its dividend the other day and the stock is up over 6% since the announcement. Exxon needs to follow suit. Exxon could raise its dividend from $1.68/year to $3.00/year and it would still only yield 4.3% It should do just that! Even then XOM would simply be in the middle of the pack with respect to its peers. I encourage XOM shareholders to contact the company directly – by phone, by email, and by snail mail and demand a dividend increase.

A dividend increase would no doubt boost the lagging stock price as well. In these times when CD rates are below 2%, money market returns negligible, and bond yields scrapping the bottom, investors want a decent return on their money. Why would anyone buy XOM yielding 2.43% when they could buy BP and get over 6% while at the same time BP is increasing oil production at a faster rate than XOM? If you’re going to get a skimpy dividend, why not buy Petrobras instead? At least you have the prospect of a significant growth in oil production and profits over the next 10 years and probably longer.

As long as I am dishing out advice to Exxon Mobil, why in the world are they spending millions on algae and biofuel research when the solution is staring them right in the face and they have already spent billions in Qatar on it? Of course I am talking about natural gas. That’s right - Exxon needs to line up and support natural gas transportation for America. Not only would it benefit the company’s worldwide LNG position, but it may also work wonders for its non-existent “green” image. Environmentalist are not fooled – they know biofuels and algae and all the rest are just distractions aimed at keeping us addicted to liquid fuels.

In the case of America, this liquid fuel is gasoline derived from foreign oil and it is quite simply bankrupting the country. Where is the Patriotism from the Exxon Mobil executives (Jim Mulva at COP, are you listening too? Considering COP’s natural gas position, you have an even bigger reason to support natural gas transportation). This isn’t just a green issue or a strategic domestic energy decision (although these should be reason enough!), there are long-term business reasons to support natural gas transportation.

If Exxon is stonewalling natural gas transportation because it somehow thinks it would cannibalize its oil business, think again. China, India, and the Middle East will be sucking up all the incremental oil production the planet has to offer over the coming years. Exxon’s profit margins in oil are secure as can be in an era where worldwide oil production will not keep pace with worldwide oil demand (assuming a functioning world economy….). Oil at $70/barrel during a near depression tells you that much. But in the long run if Exxon fails to get behind the natural gas transportation business, it may well see smaller companies like Clean Energy Fuels (NASDAQ:CLNE), Chesapeake Energy Corp. (NYSE:CHK), Devon (NYSE:DVN), and COP eat into a business that will be growing, green, and great!

Disclosure: Long on COP, STO, and PBR.