In this decade, Exxon Mobil (XOM) has generally traded in a tight range for the whole period between $75 and $100. The energy giant has constantly increased the dividend over time to now yield a normally appealing 4.4%.
Unfortunately, investors looking at the more important net payout yield knows that the company has cut the capital returns to shareholders over the decade in a very negative signal. Hence, the stock has struggled and is likely to continue this weak path going forward.
Blind Dividend Hikes
When the stock hit $100 in 2014, investors were attracted to a stock that had a dividend yield of about 2.5%. The stock has generated horrible returns in the next 5 years for investors attracted to Exxon Mobile by focusing solely on the dividend hikes.
The company last hiked the quarterly dividend to $0.82 on April 25, 2018. Exxon Mobil increased the dividend by 6.5%, and the stock has only headed lower despite what would typically be seen as an impressive dividend increase.
One of the prime reasons that the dividend hikes haven't rewarded shareholders is that they aren't based on improved financial results of the company. Exxon Mobil has yet to match the earnings power of 2014, and oil prices crashing at the end of 2018 aren't supportive of a strong 2019.
Source: Exxon Mobil Q4'18 presentation
Focus On Net Payout Yield
Investors focused on the total capital return that includes the stock buyback would understand that the investment picture has worsened over this decade. The oil giant went from a stock buyback king to one that doesn't even materially participate in stock buybacks now.
In the span of this decade, Exxon Mobil went from spending equally on share buybacks and dividends to only focusing on dividends. The net payout yield that combines the dividend yield and net stock buyback yield has gone from consistent levels near 7.5% to only 4.6% now. The company with a $315 billion market cap only returned $14 billion to shareholders in 2018.
A combination of weaker stock prices and a lower net payout yield continues to signal the problem with the stock missed by investors only viewing the dividend yield. A company unwilling or unable to repurchase shares when trading at the lows for the decade is a stock investors might want to avoid.
Weakened Balance Sheet
Over the last decade, Exxon Mobil has seen the balance sheet deteriorate despite not aggressively spending on capital returns. The energy giant should be able to handle a 4.4% dividend yield without going further into debt.
At the end of 2018, Exxon Mobil ended with total debt of $38 billion and a minimal cash balance of $3 billion for net debt of over $34 billion. The company has seen the debt levels grow in the last decade after having a net cash balance at the time of the financial crisis.
A big part of the issue with Exxon Mobil and other energy companies is that large capital expenditures limit the ability of the company to generate massive free cash flows when energy prices are low. Combined with large dividend payouts, the companies don't have the cash to repurchase shares at the most opportune time when the stock prices are beaten down.
In a few months, Exxon Mobil will announce the 2019 dividend hike. Another 6.5% increase would likely have the energy giant making another $0.05 quarterly hike to $0.87.
Such a hike would place the annual dividend payout at $3.48 per share. The dividend yield would jump to 4.6% based on the stock at $75, though, another blind dividend hike won't help the stock.
The company is forecast to see their EPS decline in 2019, so Exxon Mobil is probably wise to not repurchase shares here. Exactly why the stock isn't appealing here.
The key investor takeaway is that a lot of investors will be attracted to the higher dividend yield come April. Yet, Exxon Mobil will still pay a lower net payout yield by nearly 3 percentage points than years ago when the stock traded $10 higher.
For investors paying attention, the company continues to tell the market that value doesn't exist in the stock down here near the decade lows. The relatively high dividend yield is a false signal due to blind dividend hikes for the last decade, while the net payout yield remains a signal to follow.
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