Exxon Mobil: Consistent Dividend Growth - But At The Right Price?

Jun. 9.12 | About: Exxon Mobil (XOM)

Exxon Mobil Corporation's (NYSE:XOM) principal business is energy, including exploration for and production of crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. It is a major manufacturer and marketer of commodity petrochemicals, and operates or markets products in most countries of the world.

Exxon Mobil has been a consistent dividend paying stock, with a current dividend yield of 2.8%. The company has grown its dividend at ~8% annual compounded growth over the past 5 and 10 years. Additionally, Exxon Mobil recently announced a 21% increase in its dividend.

Included below are Exxon Mobil's historical dividends for the past decade:

Year Dividend Growth Rate
2002 $0.92 --
2003 $0.98 7%
2004 $1.06 8%
2005 $1.14 8%
2006 $1.28 12%
2007 $1.37 7%
2008 $1.55 13%
2009 $1.66 7%
2010 $1.74 5%
2011 $1.85 6%
Click to enlarge

Exxon Mobil has also done a good job of growing its free cash flow per share over the same time period, although the company did take a major hit in 2009. However, even when FCF/share was cut almost in half, the company was still able to raise the dividend, due to the extremely low payout ratio it was maintaining.

In the past, management has focused on using the company's cash to buyback shares. This has significantly reduced the share count and helped stabilize FCF/share growth, especially considering the cyclical nature of the energy industry. However, the recent dividend increase may indicate that management intends to have a more balanced approach in their use of free cash flow.

Either way, considering its currently low payout ratio, Exxon Mobil certainly has the cash flow to support consistent dividend increases in the future, potentially at a higher growth rate than in the past.

Year FCF/Share Payout Ratio (Div/FCF per share)
2002 $2.88 32%
2003 $3.97 25%
2004 $5.48 19%
2005 $7.19 16%
2006 $8.82 15%
2007 $9.82 14%
2008 $11.58 13%
2009 $6.6 25%
2010 $9.08 19%
2011 $11.97 15%
Click to enlarge

Considering the consistency of Exxon Mobil's dividend and the attractiveness that the stock may hold for income-oriented investors, a dividend discount model is one potentially helpful way to value the company.

Dividend Discount Model

In performing this valuation, I made several assumptions. First, I used 9% as my discount rate, based on the long-term average return of the stock market. Second, I used Exxon Mobil's 21% dividend increase to set the dividend growth rate for 2012. I used a constant growth rate of 10% for years 2013-15, an 8% growth rate for 2016-19, and 7% for 2020-2022. Finally, I assumed a 5% perpetuity rate after 2021.

Based on these assumptions, I calculated that Exxon Mobil's intrinsic value is $75.29 per share. At the current price, the stock is fairly valued, and perhaps even slightly overvalued.

In addition, considering my dividend discount model assumes 10% dividend growth for the next three years, most likely a more optimistic estimate considering historical performance, the current price provides no margin of safety.

Therefore, Exxon Mobil does not provide an attractive risk-reward opportunity to long-term, income-oriented investors. There are several other dividend growth stocks, such as Microsoft and Johnson & Johnson, that offer at better opportunity for the price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the dividend growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.