Friday, June 10, 2011

Exxon Mobil (XOM) Dividend Stock Analysis

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. Exxon Mobil is a component of the Dow Jones Industrials and the dividend aristocrats indexes. Exxon Mobil has paid uninterrupted dividends on its common stock since 1882 and increased payments to common shareholders every year for 28 years.

The most recent dividend increase was in April 2011, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Exxon Mobil include Chevron Corp (CVX), British Petroleum (BP) and Royal Dutch Shell (RDS-B).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.30% per year since 2001. Analysts expect Exxon-Mobil to earn $8.28 per share in 2011 and $8.85 per share in 2012. This would be a nice increase from the $6.22/share the company earned in 2010. On average the company has managed to repurchase 4.20% of its stock annually over the past decade. Exxon Mobil has one of the largest and most consistent stock buyback programs in the US.

The company has a strong reserve replacement ratio, which ensures it would not run out of oil. The sheer scale of the company gives it huge economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US. The company has over 130 projects worldwide whose goal is to increase reserves of oil and natural gas. The company’s future acquisition of XTO Energy will boost natural gas production by over a quarter. XTO’s resources are close to the markets it serves. In addition to that technical expertise from XTO energy could assist Exxon Mobil in developing new shale fields worldwide. Exxon has been accumulating natural gas assets, which could provide the company with long term dividends given the low prices of natural gas.

The return on equity closely followed the rise of oil prices up until 2008, the fall in 2008- 2009 and the subsequent increase ever since. Right now Exxon-Mobil has a high return on equity of 20%. Given the high oil prices, I expect ROE to reach its 2008 highs this year. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 7.40% per year since 2001, which is lower than the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1970, we see that Exxon Mobil has managed to double its dividend every ten and years on average.

Over the past decade the dividend payout ratio has generally followed a downward trend. This indicator spiked up on a few occasions mainly due to short term weakness in EPS caused by declines in oil and gas prices. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Exxon Mobil is trading at 11.50 times earnings, yields 2.30% and has a sustainable dividend payout. Despite rising oil prices, and the low P/E ratio, the company has a very stingy dividend payout in comparison to its peers. As a result, I would only consider adding to my position in the stock on dips below $75.

Full Disclosure: Long CVX, XOM, RDS-B

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