Is Exxon (XOM) The Giant Of The Dividend World?

By: ispeculatornew
Date posted: 08.23.2011 (5:00 am) | Write a Comment  (3 Comments)

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Exxon might have lost its title of the most valuable public company in the world to Apple, but since Apple (AAPL) continues to resist paying out any of its cash reserves back to shareholders, Exxon remains the biggest beast out there for sustainable dividend stock holders to consider. In Apple’s case, I think it’s fairly unanimous that despite its huge size, the stock remains undervalued. Is it also the case for Exxon (XOM)? As is usually the case, we will evaluate Exxon using the 20 things we look at when judging dividend stocks and also look at the sustainability of the company.

Dividend Metrics

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There is no doubt that Exxon has a very strong profile here. While its dividend payout of 2.5% or so is not spectacular, it is solid and has been increasing quickly both over 1 and 5 years.  How long can Exxon (XOM) keep increasing its payout like this? Let’s take a look.

Company Metrics

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When we consider Exxon’s size, it’s very impressive to see that sales and earnings per share have increased so much in recent months/years. The P/E ratio is fairly cheap considering Exxon’s growth and the payout ratio under 30% signals that Exxon could keep increasing its payout for years to come. It has an incredibly strong balance sheet as well with virtually no debt, which is impressive considering all of the capital requirements of running a business in the oil sector.

Stock Metrics

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Industry Metrics and Sustainability Factor

This is where things get very interesting. There is no doubt that Exxon’s performance is highly related to the price of oil. Oil has suffered a severe correction in recent months as the economy continues to suffer and its unclear what its short and medium term prospects are. I personally still think that oil will continue to increase over the next few decades simply based off of demand and supply but that could always turn out to be wrong.

As the biggest oil stock in the world, Exxon has tremendous power when it comes to negotiating with all of its partners and that is unlikely to change in the near future. How will Exxon’s position in the world change? It’s difficult to say but it is likely to change dramatically in the coming decades. First off, as oil becomes more rare, Exxon is likely to become even more profitable as prices go through the roof. However, any significant development in renewable energy that Exxon does not have a big part in could threaten its long term ability to make cash. I don’t think that is likely to happen for a very long time. I would personally consider Exxon to be sustainable in the long term but as I had mentioned, I do not believe in buying any stock “for life” so that situation might change at some point during our lifetime.

Fit Within Your Portfolio

I can’t think of any reason why Exxon (XOM) would not fit in your portfolio. It offers a solid dividend yield, excellent growth, an incredibly strong balance sheet that keeps getting better. I would not want a high concentration of oil stocks simply because of their correlation with the price of crude oil but I personally would want to hold XOM in any passive income portfolio. What are your thoughts on XOM?

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  1. Comment by Nate — August 23, 2011 @ 5:55 am

    You should perhaps examine the question, “If I’m going to invest in a giant oil company, is Exxon the best [sustainable dividend performer] in the universe of giant oil companies, at this point in time?”

    For example, contrast your analysis above with the similar analysis you did back in April for Chevron.

    I’m neutral on which company is a better investment — Exxon may very well prove better — but a closer consideration of its performance relative to comparables is in order before making the call on the specific stock.

  2. Comment by Dom Brunone — August 24, 2011 @ 9:14 am

    Compared to other oil company’s I think that ExxonMobil’s global reach, with 70+% of revenue coming from outside the USA, gives it a much more diversified portfolio as a core holding. That, in addition to its best-in-breed status as a capital allocator and a high ROCE makes it the best choice among major oils. btw, leverage to oil is less than other majors, with only 50% of its oil sales produced internally, the other 50% is purchased on the open mkt.

  3. Comment by tom — August 26, 2011 @ 3:24 pm

    When considering sustainability you should consider the gas:oil conversion ratio. SEC allows companies to express Natural Gas reserves as oil equivalent barrels based on a 6:1 conversion ratio – this is despite a 20:1 conversion ratio based on revenue. Exxon’s oil reserves have been decreasing while its gas reserves have increased. In the long term the future is not as bright as the recent past.

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