In the energy sector, the past year has been characterized much more by dividend cuts than by dividend increases. This, of course, was due to the huge collapse in oil and gas prices. With WTI crude falling from over $100 at its 2014 peak, to $26 at its 2016 low, oil companies tried everything they could to keep their dividends intact. But even drastic measures including deep cuts to capital spending, suspending stock buybacks and massive layoffs, weren't enough in some cases.
However, Exxon Mobil (NYSE:XOM) is a notable stand-out. It was the only U.S. oil and gas major to increase its dividend last year. It gave investors a 5% increase almost exactly one year ago. This allowed the company to keep its coveted Dividend Aristocrat status. It has increased its dividend for 33 years in a row, and I expect this year to be much of the same.
Exxon Mobil typically increases its dividend at the end of April when it releases quarterly earnings. It has been a full year since the last increase, meaning it's that time of year again. What should investors expect this time around?
Giving Credit Where It's Due
Exxon Mobil did a great job of navigating a brutal climate last year. Despite the huge collapse in commodity prices, the company still earned $16.2 billion in profit. It generated a 7.9% return on average capital employed, which was less than half the level from the previous year, but nonetheless was higher than its peer group. The company retained its 'AAA' credit rating, and is one of only three U.S. publicly-traded companies with the highest credit rating possible.
Exxon Mobil accomplished all this by focusing on efficiency and cutting costs everywhere it could. It slashed its stock buyback program by $9 billion last year. Capital and exploratory spending came in at $31.1 billion last year, down 19% from 2014.
Exxon Mobil's refining business also helped the company remain profitable last year, in one of the worst years for the oil and gas industry in recent memory. While upstream earnings collapsed 74% in 2015, due to the commodity price collapse, downstream earnings more than doubled year-over-year, to $6.5 billion. This is one of the benefits of the integrated structure. Downstream, which includes refining, actually improves when oil prices decline, because falling oil prices lower feedstock costs and boost margins.
These factors will help earnings stay afloat, even if commodity prices stay at their current depressed levels. Another factor helping to boost future cash flow will be that Exxon Mobil will benefit from a number of large upstream projects coming online. The company completed six major upstream projects last year with total production capacity of almost 300,000 barrels per day, including two major deep-water projects in offshore Africa, and an expansion of the huge Kearl Canadian Oil Sands project. Even though commodity prices are still very low, which will limit the revenue generation of this production, just the fact that these projects will go from a use of cash to a source of cash, will be immensely helpful to Exxon Mobil.
As a result, Exxon Mobil is in the unique position of still being able to raise its dividend, even during the bust periods of the oil cycle.
Set Realistic Expectations
Exxon Mobil has a fortress balance sheet and remains solidly profitable. It also has strong liquidity, with a manageable 18% debt to capital ratio. It is one of the few companies that can continue to raise dividends in such a difficult operating environment. Even though earnings collapsed 49% last year, its current $2.92 per share dividend represented 75% of its 2015 earnings per share. There is still room for an increase, but it will likely be a modest one.
For these reasons, I expect the company to increase its dividend yet again at the end of this month. But investors should also not get ahead of themselves - the company doesn't have nearly as much financial flexibility as it did in years past, when commodity prices were much higher.
As a result, I think another 5% raise is in order. That would take Exxon Mobil's new quarterly dividend rate to $0.767 per share, which comes out to approximately $3.06 per share annualized. While that might not seem too impressive on the surface, in the context of the brutal decline in oil and gas prices, investors should feel fortunate to be getting any increase at all.
Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.