Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are two integrated U.S. energy behemoths. These two companies are among the world's largest corporations, while Exxon Mobil is also the world's largest dividend payer. They have benefited from higher oil and natural gas production and energy prices, and have generated attractive returns on invested capital, currently exceeding 20%. These days, the stock prices of both companies are touching fresh 52-week highs. Traditionally, Chevron has paid a higher dividend yield, currently around 3.2% versus Exxon Mobil's 2.6%. Is Chevron going to be a better dividend play than Exxon Mobile for the next five years?
Looking at the past performance, it may be concluded that Chevron proved to be a better dividend play over the past five and ten years. Ten years ago, Chevron had a dividend yield of 4.0%, while Exxon Mobil boasted a dividend yield of 2.9%. In the subsequent years, despite the consistent increases in the dividends, both yields were compressed due to high price appreciation - hence today's lower yields. Chevron grew its dividends at an average rate of 10.0% per year over the past decade, while Exxon Mobil boosted dividends at a rate of 9.5% per year. During that period, Chevron outperformed Exxon Mobil by returning 16% per year compared to Exxon Mobil's 12.6%. Over the past five years, Chevron returned 9.8% per year, compared to Exxon Mobil's 3.2% per year.
One reason for this outperformance could be Chevron's higher rate of EPS growth. Over the past five years, Chevron's EPS grew at an average rate of 11.5% per year, compared to Exxon Mobil's EPS growth of about 5% per year. Exxon Mobil's performance was hurt by plummeting natural gas prices, given the company's greater leverage than Chevron's to U.S. natural gas after the former acquired a U.S. natural-gas company, XTO Energy, in late 2009. In terms of valuation, Exxon Mobil also traded at a premium to Chevron over the past five years, despite lower growth. Exxon Mobil's average five-year P/E was 12.2 compared to Chevron's average five-year P/E of 9.8.
Now, Chevron currently pays a 60 basis point premium in terms of the dividend yield. Historically, its dividend growth over the past five years has been marginally lower by 1 percentage point compared to that of Exxon Mobil. In fact, only with Exxon Mobil's latest dividend hike of 21% is the company's dividend growth faster on average than Chevron's over the past five years. Assuming that the companies will maintain their dividend hikes at average growth rates achieved over the past five years, Chevron is likely to provide a higher yield on cost over a five-year investment horizon. Assuming a 9.75% annual growth for Chevron's dividends over the next five years, the company's dividend yield on cost (based on the current stock price) after five years will be 5.24%. For comparison, assuming dividend growth on average of 10.7% per year, Exxon Mobil's yield on cost in five years will be 4.44%. Excluding capital growth, Chevron makes a better dividend play than Exxon Mobil, based on the aforementioned estimates.
However, if Exxon Mobil's latest large dividend hike provides any indication about future dividend boosts above the average realized over the past five years, Exxon Mobil's future yield on cost could easily surpass Chevron's. Moreover, analysts forecast that Exxon Mobil will achieve higher EPS growth than Chevron over the next five years. The former is expected to expand its EPS at an average annual rate of 7.5%, compared to Chevron's rate of 3.7%. Still, as for valuations, Chevron continues to trade at a discount to Exxon Mobil. It is also trading at a discount to its own historical average. However, that discount is consistent with past patterns. Both companies have very low dividend payout ratios - 24% for Exxon Mobil and 27% for Chevron - which suggests they have plenty of room to hike dividends in the future. However, there are some suggestions that Chevron may be reluctant to boost dividends much more in the future. While its cash pile swelled in the past quarter to $21 billion, surpassing Exxon's $13 billion, the company said it would "keep extra cash as a cushion against volatile crude prices and possible cost overruns at its mammoth $37 billion Gorgon natural-gas project in West Australia," according to Wall Street Journal.
Exxon Mobil is almost double the size of Chevron in market capitalization. The company also produces as much as two thirds more oil and natural gas. Historically, Exxon Mobil has earned higher profit per barrel of oil equivalent produced than Chevron. However, these trends seem to have reversed as Chevron's profitability per barrel currently exceeds that of Exxon Mobil, based on the recent quarterly reports. Chevron's total production is more leveraged than Exxon Mobil's to oil, which is currently more profitable than natural gas. With oil prices rebounding from recent lows, this suggests that Chevron has more room to grow, which could provide for higher rates of capital growth.
Both Exxon Mobil and Chevron are popular stocks among fund managers. Billionaire fund managers Ken Fisher and Ken Griffin are all bullish about Exxon Mobil. On the other hand, Phill Gross (Adage Capital Management), Jim Simons, and George Soros are bullish about Chevron. Billionaire Cliff Asness holds large stakes in both companies. We think both companies are attractive dividend growth plays but we prefer Chevron over Exxon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.