Stocks that pay out dividends are popular among investors. And with good reason. There’s research that points to a large share of overall returns stemming from reinvested dividends. But – there’s also evidence that investors have lost money by relying on this tactic when share prices fall more than the earnings from dividends.
All this aside, Exxon is an attractive stock – it’s known for its clockwork 7.3% yield with 10 years of history to back it up. It’s not surprising that investors buy Exxon shares purely for the dividend payments.
Recent drops in share prices make Exxon’s dividend payments look even more attractive – but it’s important to note the times. The events of the last few months could have drastically impacted Exxon prospects.
Warren Buffett’s rules come to mind when considering any stock purchase:
- Don’t lose money.
- See rule #1.
So, how can you know if Exxon is a good dividend investment for you?
Is Exxon Dividend a Value Trap?
To better understand Exxon’s value, you need to take a look at three things:
- Payout ratios
- The company balance sheet
- Dividend volatility
Companies normally pay their shareholder dividends out of the company’s earnings. When a company is continuously paying out greater dividends than the company actually earned, it can cause dividend instability.
It’s vital to understand if Exxon’s current dividend is viable. Can Exxon sustain continued 7.3% dividend payments in relation to company net profit less tax?
Since 2019, Exxon paid 102% of profits as dividends. If you’re looking to own Exxon for a given number of years, payout ratios over 100% should be a red flag of sorts.
Another aspect that needs consideration is free cash flow (FCF). Is Exxon’s FCF enough to cover dividends? Because of its cash payout ratio, which hovers around 274%, its dividends aren’t covered well.
Its high cash payout ratio is suggestive of payouts coming from cash in the bank or some type of loan – and neither source is preferable over time.
From the perspective of dividends, cash on hand or in the bank is a bit more important than profits – but because Exxon’s payments aren’t covered well by either, sustainability is a concern.
Is Exxon’s balance sheet shaky?
Because dividends aren’t covered well by profits, it’s necessary to take a look at Exxon’s balance sheet.
Is it possible the company is in financial distress? An easy way to check this is with two simple formulas:
- Net interest coverage
Take the company’s net debts and divide by earnings before any interest, taxes, depreciation, or amortization is applied. This is a formula that measures a company’s total outstanding debts.
Net interest coverage is a measurement of a company’s ability to make payments on interest.
These two formulas survey whether the company has too much debt and, if so, can the company afford their interest payments?
Recent calculations suggest Exxon’s net debt is 1.38 times higher than its EBITDA – for most companies, this is a doable debt level.
Net interest coverage is calculated by looking at earnings before interest and taxes, or EBIT, then dividing the amount by net interest expenses.
Exxon’s EBIT is 14.01 times greater than interest expenses. In other words, Exxon has no problem covering their interest expenses.
Income investors seek long term dividends. If a company’s dividends aren’t reliable, would you still buy the stock?
In the interests of time, we’re just looking at Exxon’s last ten years of dividend payments – although the company has been issuing dividends for much longer.
Over the past decade, Exxon’s dividends have been stable. This is good news! This means that Exxon’s business is resilient regardless of what the markets may throw its way.
At the beginning of this ten-year block, Exxon’s dividend payment was $1.68/share (2010) and closed out 2019 with dividend payments of $3.38/share – which works out to a 7.6% CAGR, or compound annual growth rate.
Why Buy Exxon Stock?
If you like investing in trusted dividend stocks, Exxon is one of the world’s largest producers of energy. In the long run, betting against Exxon is probably not the best idea.
That said, 2020 has hit the oil industry like a crushing hammer. Volatility could grow over the months upcoming. After all, there aren’t any industries that haven’t felt 2020’s weird energy in some manner.
Current shareholders might want to stick it out with Exxon in their portfolio as-is. On the flip-side, you could also consider striking an At The Market, or ATM, call.
By choosing a future date and covering your call position, you can greatly decrease your portfolio’s volatility. It also offers a bit of protection on the downside and lets you potentially move up.
Should You Sell Exxon Stock?
While the oil industry took a devastating hit earlier this year, it isn’t the first time the industry has suffered setbacks. And it’s been making a steady comeback, albeit slowly.
Exxon is only around 35% off from its norm, but some analysts think this is an indication of future woes in the industry.
While it appears selling is in your best interests, selling your Exxon shares still remains a personal decision at this point.
Is Exxon a Good Dividend Stock?
Dividend investors always consider the following:
- Are a company’s dividends affordable?
- Does the company make consistent dividend payments?
- Do the company’s dividends have room to grow?
In the case of Exxon Mobil, nearly all its cash flow and most of its profits were paid out in dividends. While this is good temporarily, it doesn’t leave a lot of room for the company to reinvest in the actual business. And due to the downturn at the beginning of the year, the company’s overall earnings have shrunk.
Dividend payments are rather steady, but how much longer can Exxon keep it up if earnings continue to dwindle? Looking at this from a dividend-only perspective, Exxon probably isn’t an optimal choice.
Analysts agree that, if Exxon’s earnings-per-share ratio doesn’t increase over time, its dividends could come under fire – whether due to cost directly or due to inflation. Bottom line is Exxon remains at the mercy of the market.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.