Exxon Mobil (XOM) shares have recently broken down to new lows and have become an enticing buy for investors looking for a Dividend King on sale. While the stock performance has not been great for many years, investors can see positive performance with well-timed purchases. The company and its operations are highly correlated to the oil commodity market and can see significant swings when it is under pressure. However, shareholders with a long-term horizon may do well to start a position in this diversified conglomerate with a 4.5%+ yield.
In its most recently reported quarter, Exxon Mobil showed us results that were impressive to say the least.
(Source: Seeking Alpha)
Exxon saw massive revenue growth, which of course was related to higher oil prices. Thanks to the higher revenue, it was able to blow away earnings as well. Thanks to trends of becoming more efficient with lower oil prices, the company saw strong cash flow from operations of $11.1 billion, and when including asset sales of $1.5 billion, it had cash flow of $12.6 billion.
Below we see a better picture of the company's financial results.
(Source: Investor Presentation)
With free cash flow of $7.2 billion, Exxon Mobil had a payout ratio of less than 50% for dividends. Additionally, the company improved its cash position and reduced its debt slightly. This is an important metric to watch, as Exxon continues to be price sensitive and needs the ability to service debt along with growing distributions.
If we take a look at the largest contributor upstream, we can see that crude prices and gas prices were responsible. Volume was partially beneficial as well.
With the recent oil price decline, it would be beneficial to look at where we may be in the coming quarter. So, where was oil then compared to now?
A quick look shows us that oil was around $51-60 per barrel in the 4th quarter of last year. With oil prices actually higher in October of this year and also November for the most part, we should expect a lower net price in December. This will be obviously a negative for company earnings, but we do know that Exxon has become more efficient at identifying profitable operations at lower oil prices.
The company identifies this in its presentation showing that it can drive earnings growth in the coming years even if oil is at $40 per barrel.
This is important to note, as many investors are selling XOM shares based on oil prices falling. If the company can meet its goals and produce earnings growth with low oil prices, we can only hope to see an acceleration with higher oil prices. I believe oil prices will have to reside above $50 per share at least in the coming years, as many of the economies of oil-producing nations require oil prices even higher than this to meet budgets.
Exxon continues to project higher profits at lower oil prices, which means investors can count on management not being overly optimistic about hitting targets.
Should oil prices improve above these levels, we can presume even higher earnings and higher share prices. With a quick look below, we can see where we see cash flow may be in the coming years should targets be met.
An investment in the stock and holding on to shares should be based on the above goals being met, which we can revisit in future earnings reports. But it is safe to say that should the goals be met, the shares today offer an intriguing value.
Taking a look below, we see that valuation is attractive on a 5-year trading basis.
At a glance, we see shares now trader at a lower P/S, P/CF, P/B, and forward P/E. This should give investors confidence knowing their operations are stronger than ever, and yet, are trading lower than they were the last time oil crashed.
I also like to analyze historical yield for perspective on when may be an above-average yield.
Sure enough, we are at the highest yields in trading history for the last 20 years for the stock. This, to me, implies buying opportunity. As we can see, anything above a 3.75% yield is considered abnormally high. With 4.78% as a yield and rising due to 36 years of dividend hikes, investors will be able to let the work of compounding do wonders for their portfolio.
(Source: Seeking Alpha)
With an attractive 5-year growth rate of 7%, investors could see at least this for a raise next year, or if oil prices continue to be weak, maybe even a 5% increase in the dividend. This would lead to a dividend of $3.44 or a yield if buying shares today of over 5%. This seems very attractive for new investors.
With the stock market experiencing its worst week since the financial crisis, oil pricing under pressure, and the economy functioning strong, the old adage "Buy when there is blood in the streets" is starting to look like what is needed here. Sometimes we must make our equity purchases when it feels the worst, and right now, you can do so while being paid to wait. I believe in finding yield when it is on sale, and sure enough, we get that with a company that is fully capable of funding its dividend and growing it. With premier assets, Exxon can weather the downturn. I have purchased shares at $69 and some more as XOM fell a bit further. If shares move further downward and start to yield above 5%, I will add again. Investors looking for a safe play in the oil space may do well with shares of XOM in their portfolio.
Disclosure: I am/we are long XOM. 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.
Additional disclosure: I am not a financial advisor and any recommendations in this article are of opinion. You should consult a financial advisor before making any investment decisions and we are not held liable for any investment analysis in this article.