Why Exxon Mobil Corporation Will Rebound for Income Investors
February 10, 2017
Nothing gets my attention quite like a large-cap dividend payer whose stock is slumping. Exxon Mobil Corporation (NYSE:XOM) stock, for instance, is down roughly 10% year-to-date and off about 15% from its 52-week highs.
Now, that might not be such a big move for a micro-cap mining stock, but for the largest energy company in the world, it’s definitely a significant pullback and worth looking into.
So is XOM stock an attractive dividend bargain or just a big old value trap? Let’s take a look Exxon’s most recent results and figure it out.
Impaired Ability
To put it plainly, Exxon’s Q4 results were ugly. Really ugly.
First of all, revenue increased two percent year-over-year to $61.02 billion, missing the average analyst estimate by $1.26 billion. And on the bottom line, Exxon only earned $1.7 billion due to a massive $2.0-billion impairment charge related to dry gas operations. In fact, the Q4 earnings represent the company’s slimmest quarterly profit in more than 17 years.
Now, to be fair, Exxon’s Q4 profit would’ve come in at about $3.7 billion without the impairment charge, up significantly from the year-ago period of $2.8 billion. So it would make sense for investors not to extrapolate too much from the weak bottom line.
What was more concerning among analysts, however, is that Exxon’s production was down three percent year-over-year. That’s especially disappointing because many thought Exxon would see improved production amid the bump in oil prices.
Unfortunately, that soft volume is well in line with management’s guidance of flat production through 2020, reinforcing bearish concerns over the company’s growth trajectory going forward.
Still, management struck an optimistic tone.
“Financial results for the year were negatively impacted by the prolonged downturn in commodity prices and the impairment charge,” said Chairman and Chief Executive Officer Darren W. Woods. “The company’s continued focus on fundamentals and our ability to leverage an attractive global portfolio through our integrated business ensures we are well positioned to generate long-term shareholder value.” (Source: “ExxonMobil Earns $7.8 Billion in 2016; $1.7 Billion During Fourth Quarter,” Exxon Mobil Corporation, February 8, 2017.)
Cashing Out
But while Exxon’s production decline is certainly concerning, the great news for income-oriented investors is that the oil and gas behemoth continues to spit out cash—and tons of it.
In Q4, cash flow from operations and asset sales was a whopping $9.5 billion. That easily covered the $3.1 billion in distributed dividends and net investments of $3.8 billion during the quarter. So although it might be challenging for Exxon to significantly boost its long-term production, there should be ample room for value-enhancing dividend increases and share repurchases down the road.
For the full-year 2016, per-share dividends were up 3.5% year-over-year, marking the fourth consecutive year of per-share dividend growth.
The Bottom Line on XOM Stock
I’d seriously consider XOM stock at these levels.
Despite continued sluggishness in oil prices and worries over Exxon’s long-term production, the company remains a high-return, highly integrated cash cow. Moreover, Exxon’s recent Permian Basin acquisition has the potential to more than double production in the area to six billion oil-equivalent barrels, providing at least some upside for investors.
More importantly, with a dividend yield of 3.6% and a debt-to-equity of just 0.2, the downside in XOM stock seems limited enough to bet on it.
