Exxon Mobil: 32 And Counting

| About: Exxon Mobil (XOM)

Summary

Oil giant announces 32nd consecutive dividend increase.

Low payout ratio, moderate free cash flow, and moderate buyback indicate dividend growth will continue.

Morningstar says Exxon is one of the few stocks left in the market trading lower than its fair value.

Exxon Mobil (NYSE:XOM) has just announced a 9.5% increased to its quarterly dividend, as Seeking Alpha has covered here. This marks the 32nd consecutive year that the oil giant has increased dividends.

New Dividend and Yield: The new annual dividend of $2.76/share gives Exxon a current yield of 2.70%. As shown in the chart below, the current yield (in green) is higher than the five-year average yield (in red). Also, 2.70% is one of the highest yield levels in the past 4 years.

(Source: YCharts.com)

Dividend Growth Rate: The table below shows the 5-year dividend growth rate. The average stands at a decent 10.58%. With earnings expected to grow at just 3%/year for the next 5 years, the dividend growth rate might slow down to high single-digits.

(Source: Yahoo Finance)

Payout Ratio: In spite of paying ever-increasing dividends for more than 3 decades, Exxon's trailing payout ratio stands at a moderate 37%. Based on 2014's and 2015's earnings estimates, the forward payout ratios stand at 36%.

Free Cash Flow: Now that we've established that dividends seem safe from a payout perspective, let's see how the Free Cash Flow [FCF] stacks up.

  • Exxon's average quarterly FCF stands at $4.25 billion.
  • The minimum and maximum stand at -$3.3 billion and $11.4 billion.
  • Total outstanding shares as of now stand at 4.32 billion. So Exxon is committing $2.98 billion/qtr to shareholders (4.32 times $0.69/qtr).
  • While Free Cash Flow has not been as steady as one would like, the average quarterly FCF has been higher than the new dividend requirement of $3 billion in 14 out of the last 20 quarters.

Buyback: Exxon also has a buyback program, one of the best. The share count has gone down by 15% in the last 5 years. It is easy to see the impact of a steady buyback program, as the share count has decreased gradually.

As a reminder, when a steady dividend payer like Exxon retires shares, the company saves tons of dividend money in the long term.

(Source: YCharts.Com)

Extrapolation:

  • The table below shows the potential yield on cost for a long-term investor buying Exxon today.
  • The table assumes 7%/year dividend growth for 10 years. This is slightly conservative given the recent dividend growth history, but it does not hurt to be conservative. Also, earnings are expected to grow at just 3%/year for the next few years.
  • Even under such pessimistic assumptions, the yield on cost will almost double for the patient investor.
  • Exxon's earnings are expected to grow at just 3%/year for the next 5 years. If this holds true, the EPS will be around $8.5. Even if Exxon maintains the low payout ratio of 37%, investors will be looking at an annual dividend of $3.16. This represents a 15% jump from the current level of $2.76/share.

(Source: Current dividend and share price from Yahoo Finance)

Conclusion: Big oil companies are going nowhere anytime soon, especially considering the fact that we frequently have some disturbing news about oil-rich Middle East countries. Exxon is perhaps one of the safest stocks to bet on for the next decade.

This stock still has many nice features for long-term dividend growth investors:

  • A lengthy dividend growth streak.
  • Reasonable free cash flow and low payout ratio.
  • Wide moat.
  • As a bonus, the venerable Morningstar has a fair value estimate of $109, which is nearly 7% from the current price. Not many stocks are below Morningstar's fair price value these days.

With Exxon reporting earnings on Thursday, be prepared to pull the trigger if the stock drops.

Click here to read about the dividend increase of the other giant, Chevron Corporation (NYSE:CVX).

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

Business relationship disclosure: Business relationship disclosure: The article was written by Tradevestor's analyst. Tradevestor is not receiving compensation for it (other than from Seeking Alpha). Tradevestor has no business relationship with any company whose stock is mentioned in this article.

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