Why Don't You Buy 4.1%-Yielding Exxon Mobil For Your DGI Portfolio?
- Exxon Mobil makes an excellent long-term value proposition for income investors seeking a high-quality dividend.
- I think the drop is a good opportunity to add XOM to a DGI portfolio.
- Exxon Mobil will most likely continue to raise its dividend payout going forward.
- XOM offers income investors an entry yield of 4.1 percent.
Exxon Mobil's (NYSE:XOM) shares have slumped precipitously in 2018 as part of a wider market correction and a drop in crude oil prices. That said, though, I think the correction is an excellent opportunity to scoop up shares of Exxon Mobil for a DGI portfolio. The energy company is a high-quality income vehicle raking in loads of cash. As a result, Exxon Mobil has a low-risk dividend that is more likely to go up over time than it is to go down. An investment in ExxonMobil yields 4.1 percent.
Massive Correction Creates Entry Opportunity
Exxon Mobil's shares have taken it to the chin in 2018. Year-to-date, the energy company's share price dropped ~10 percent as volatility crept back into the stock market. Investors quickly sold Exxon Mobil into the weakness, which I think was a big mistake.
Here's Exxon Mobil's share chart depicting the crash in the first quarter of 2018. Shares fell from about $90 to the low $70s but now appear to be bottoming out.
A lot of factors have weighed on the stock market and Exxon Mobil lately:
1. Big tech has come under growing pressure as far as data privacy is concerned. The sell-off in tech has led the entire stock market lower;
2. The United States and China are going back and forth, hitting each other with new tariffs, raising concerns over the possibility of a large-scale trade war;
3. Interest rates are rising, which is typically seen as a hurdle for stocks; and
4. Oil prices dropped in 2018.
Here's the oil price chart for WTI and Brent crude.
The good news is that oil prices have started to rebound again, suggesting that the drop in Exxon Mobil's valuation is exaggerated. Exxon Mobil, after all, is one of the few energy companies that has actually raised its dividend payout during the last downturn, something not a lot of energy players can say.
Exxon Mobil's dividend has grown for a long time, and if even the most severe bear market in years couldn't derail the company's dividend growth, income investors should take notice.
Exxon Mobil's dividend is backed by a mountain of free cash flow. In 2017, the energy company covered all of its investment spending and dividends easily with free cash flow. Exxon Mobil's free cash flow for 2017 totaled a whopping $14.3 billion.
Source: ExxonMobil Investor Presentation
Importantly, higher price realizations in Exxon Mobil's upstream business will translate into significant earnings and free cash flow growth. The higher prices climb, the bigger the earnings tailwinds for Exxon Mobil.
Here are Exxon Mobil's in-house earnings predictions relating to different base case oil price scenarios.
And here's how Exxon Mobil's free cash flow would improve based on different price scenarios.
Risks Investors Need To Consider
The biggest risk for Exxon Mobil would be a U.S. recession with an accompanying, steep drop in energy prices. While this would likely negatively affect the company's share price, the dividend, however, would be quite safe in my opinion. Thanks to its strong cash flow position, Exxon Mobil has one of the safest, low-risk dividends in the sector.
It is easy to lose sight of the big picture in times of market turbulence and when share prices are in retreat. That said, though, I think keeping the eye on the ball - Exxon Mobil's dividend growth - will serve investors well over the long haul.
Investors will always find new reasons to sell in times of market weakness, but Exxon Mobil will most likely going to continue to raise its dividend payout, and increase investors' yield on cost. After all, the company did so during the worst bear market in decades. Buy the correction for income and capital appreciation.
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