Exxon Mobil: A Surging Dividend, But Will It Last?

| About: Exxon Mobil (XOM)

Exxon Mobil Corporation (NYSE:XOM) is one of the world's largest companies, with a market capitalization of $420 billion, annual revenue of $486 billion, and a staggering net income of $41 billion for 2011. These statistics are at the top, trailing Apple Inc. (NASDAQ:AAPL) in market capitalization but leading in U.S. publicly traded companies for revenue. XOM is a vertically integrated oil and gas company with global operations spanning every continent, save Antarctica. Its initial founding was back in 1882; however, its current form was the result of a merger between Exxon and Mobil back in 1999.

In addition to all of these superlatives, XOM has a long history of paying dividends and providing good annual growth. However, it's consistency is more notable than its actual yield. With a forward dividend estimate of just $2.40 on recent closing price of $91.03, XOM has a relatively low forward yield of just 2.6%, a little above the broader market as a while, but substantially below companies like AT&T Inc. (NYSE:T) and Verizon Corporation (NYSE:VZ) from telecom and even other oil companies like ConocoPhillips (NYSE:COP) or Chevron Corporation (NYSE:CVX).

The following table shows the recent historical and projected quarterly dividends for XOM.

Historical and Projected Quarterly Dividends
Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 8/9/2013 0.630 10.5%
Projected 5/10/2013 0.630 10.5%
Projected 2/8/2013 0.570 21.3%
Projected 11/8/2012 0.570 21.3%
Historical 8/9/2012 0.570 21.3%
Historical 5/10/2012 0.570 21.3%
Historical 2/8/2012 0.470 6.8%
Historical 11/8/2011 0.470 6.8%
Historical 8/10/2011 0.470 6.8%
Historical 5/11/2011 0.470 6.8%
Historical 2/8/2011 0.440 4.8%
Historical 11/9/2010 0.440 4.8%
Historical 8/11/2010 0.440 4.8%
Historical 5/11/2010 0.440 4.8%
Historical 2/8/2010 0.420 5.0%
Historical 11/9/2009 0.420 5.0%
Historical 8/11/2009 0.420 5.0%
Historical 5/11/2009 0.420 5.0%
Historical 2/6/2009 0.400 14.3%

Source: Yahoo!Finance, Author estimates.

What is notable about the history is its recent dividend growth - topping 20% on the last increase to $0.57 per share. This should give investors hope for the future.

The first key question is whether or not one thinks that XOM will be able to sustain high growth for its dividend. For 2011, XOM had a payout ratio of 23% to net income and 17% to operating cash flow. Even reducing the operating cash flow for capital expenditures, the ratio would still be 38%. However, XOM is also a substantial purchaser of its own stock. In the last three years (2009-2011), XOM has repurchased over $50 billion of its own shares. So while the dividend payout ratio is not really high, especially compared to other oil companies, shareholders are seeing the excess capital being returned in the form of stock buy-backs. Furthermore, with another $10 billion repurchased over the first half of 2012, it appears this will continue.

Hence it appears that there is at least some space to continue to grow the dividend even if the underlying fundamentals do not strengthen. This is good since the 2012 estimated EPS is just $7.72 per share, which implies a ratio of about 28%, based on 2012 estimated dividends of $2.18. That number is projected to grow to $8.18 for 2013. (per Yahoo!Finance) This would have a payout ratio of 30% for a $2.46 dividend. With recent dividend expansion of over 20%, after a long period of single digit growth, it seems like XOM will not be able to sustain that type of growth trajectory.

My projected 10% growth would be reasonable with a slight uptick in payout ratio. However, investors should be cautioned that a 30% payout ratio exceeds recent payout ratios for all years with the exception of 2009, when EPS dipped below $4. So while the dividend has surged forward recently, with a quarterly increase of $0.10 earlier this year, it is unlikely that this pace will continue for the next increase.

Disclosure: I 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.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

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