Buying 4.3%-Yielding Exxon Mobil Is A No-Brainer
Summary
- Exxon Mobil released better-than-expected Q4 2018 earnings on Friday.
- A drop in price realizations expectedly hurt Exxon Mobil's upstream results.
- Exxon Mobil continues to rake in a mountain of free cash flow.
- Shares are affordable based on forward earnings.
- An investment in XOM yields 4.3 percent.
Exxon Mobil (NYSE:XOM) is a screaming "Buy" for investors that seek to build a high-quality investment portfolio and that want to secure steady dividend income. Exxon Mobil pulls in a mountain of free cash flow, and pays shareholders an attractive dividend. Shares are affordable and the energy company will most likely continue to grow its dividend payout going forward. An investment in Exxon Mobil at today's price point yields 4.3 percent.
Fourth-Quarter Update
Exxon Mobil released fourth-quarter earnings on Friday that beat expectations.
The energy company said it pulled in $1.41/share in profits for the fourth quarter compared to $1.97/share a year ago, reflecting a decrease of 28 percent year over year. The analyst consensus, however, was for earnings of $1.08/share, so Exxon Mobil delivered a handsome earnings beat.
Crude oil prices slumped in the fourth quarter due to growing fears over an economic slowdown, which negatively impacted Exxon Mobil's upstream results to the tune of $1.1 billion. Negative price effects were partially offset by production growth. As a result, Exxon Mobil's total upstream profits in the third quarter dropped to $3.3 billion, down from $4.2 billion in the previous quarter.
Source: Exxon Mobil Investor Presentation
While Exxon Mobil's upstream profits declined on the back of weaker price realizations, the company's downstream business produced better results.
Exxon Mobil's downstream earnings were significantly boosted by asset sales and margin improvements in Q4 2018. Total downstream profits, including asset sales, jumped ~65 percent from $1.6 billion in Q3 2018 to $2.7 billion in Q4 2018.
Source: Exxon Mobil
Though lower price realizations hurt Exxon Mobil in the fourth quarter, the energy company nonetheless raked in $3.0 billion in free cash flow. In 2018, Exxon Mobil pulled in a whopping $19.6 billion in FCF, marking a ~37 percent increase over 2017. Taking out $13.8 billion in shareholder distributions (~70 percent of free cash flow) leaves $5.8 billion in excess cash in Exxon Mobil's bank.
Source: Exxon Mobil
A Yield Play
Exxon Mobil, while being a directional bet on higher energy prices, is a high-quality yield play, first and foremost. Exxon Mobil raised its dividend payout during the last energy bear market, which greatly improves XOM's value proposition for DGI investors.
Here's Exxon Mobil's 5-year dividend growth chart.
Data by YCharts
Valuation
Exxon Mobil's shares are comparatively cheap on a forward earnings basis, and exhibit an appealing risk/reward for long-time investors. Today, income investors that seek access to one of the safest dividends in the sector pay less than 14x next year's estimated earnings.
Data by YCharts
Risk Factors Investors Need To Consider
A cyclical downturn combined with a decrease in price realizations represents the biggest risk for investors. As a result, Exxon Mobil's valuation multiple could contract in case a U.S. recession manifests itself and energy prices drop once again. Given Exxon Mobil's comfortable free cash flow position, however, I don't see the dividend at risk at all.
Your Takeaway
Exxon Mobil brings a lot of value to the table for income investors that want to play it safe: No matter the market environment, Exxon Mobil pulls in a huge amount of free cash flow which backs a growing flow of dividends. Exxon Mobil also raised its dividend payout throughout the last energy downturn, which greatly improves the value proposition for DGI investors. Shares are affordable based on forward earnings, and the dividend as well as the yield on cost are most likely going to grow going forward. Buy for income and capital appreciation.
This article was written by
Analyst’s Disclosure: I am/we are long XOM, COP. 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.
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