Dividend Growth Plan Addition: Exxon Mobil Corp.
- I have the opportunity to add a new position to my dividend growth portfolio due to recent moves made during my first quarter review.
- I'm interested in finding a viable Dividend "Champion" to add for steady growth of income and capital preservation.
- XOM presents an interesting opportunity due to significant undervaluation and expectations of appreciation with more upside than down.
In my First-Quarter 2020 Portfolio Review, I did some rebalancing and restructuring to my dividend growth portfolio. This included trimming Target (TGT) and selling CVS (CVS). This also freed up some capital to acquire new positions.
After selling CVS, the total number of positions in the portfolio was 20. My end-goal is to build the portfolio up to 40-50 positions. With only 20 stocks currently, I'm not looking to expand any existing positions and instead focus on opening new ones.
To identify a viable new position, I began by copy and pasting the Champions tab only from the CCC list (maintained by Justin Law) into the screener tool provided. I'm not doing the entire list for now due to current market volatility and possible impending dividend cuts. This narrows to the pool of companies that have a history of stable dividend growth. Within the screener tool, I made the exception rule be two. To begin narrowing down the pool, I first eliminated financials and real estate. These sectors present too much risk at this phase of my portfolio.
During the quarterly review, I identified two non-defensive sectors that were overweight, Consumer Discretionary and Industrials. My plan requires that non-defensive sectors not make up more than 10% of the total portfolio. As a result, I also eliminated those sectors from the pool. Below is the list of 30 stocks that resulted and their sector:
The next step is to do individual research on each one. I simply go down the list top to bottom. I skipped American States Water (AWR) and Medtronic (MDT) as these are already in my portfolio. My main source for research is Morningstar reports provided by my brokerage.
There are two primary ways I initially eliminate stocks from my shortlist. The first being limited research. If I can't find much information, then I don't feel comfortable moving forward. I want to have at least a Morningstar report. Secondly, I look at risk and valuation. Stocks are eliminated if they have a fair-risk adjusted return (or worse) and/or are fairly too overvalued (as compared to their sector). When I'm looking at the entire CCC list, I'll also look more in-depth at dividend history. Those that were eliminated are crossed out above.
The remaining stocks included Archer-Daniels-Midland (ADM), John Wiley & Sons Inc. (JW.A), Sonoco Products Co. (SON), UGI Corp. (UGI), Walgreens Boots Alliance Inc. (WBA), and Exxon Mobil Corp. (NYSE:XOM).
Due to the crash in oil prices, XOM is significantly undervalued as compared to its peers and the total stock market. Additionally, their stewardship is exemplary, and appreciation is highly likely. Currently, the company is focused on using capital to expand operations and acquisitions with the goal of doubling earnings by 2025. They've also made it clear they want to share those earnings with shareholders.
The 7.5% dividend does come with risks associated with their spending. They currently have a high Payout Ratio at 109% and a low Return on Equity of 7.5%. The dividend growth rate has a slight increase this year but is stagnant overall in the past five years and down overall in the past 10 years (see below). Realistically, given the spending and oil crash, we could see a dividend freeze. However, I do think, in the long run, they will return to a 5%+ dividend growth. If a freeze occurs, the stock will need to be "benched" meaning I'll need to do an in-depth review on during the next quarterly review per my business plan.
Due primarily to the significant under-valuation and forecasted appreciation, I decided to move forward in opening a position in XOM. With regards to income and dividends, it barely makes the cut, and there is certainly risk moving forward. With that I said, I opened a position in XOM on 5/3/2020 bringing the total number of positions to 21.
I still have some more capital to spend, so I anticipate opening another position in the month of May. I hope this article helps you develop or refine your own plan. Please let me know your thoughts on XOM or any stocks you are looking into for your DGI portfolio.
This article was written by
Analyst’s Disclosure: I am/we are long XOM, MDT, AWR, WBA. 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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