Up to date on March twenty ninth, 2024 by Bob Ciura

Lengthy histories of dividend development should not typical within the vitality sector. The oil and gasoline {industry} is extremely cyclical, stopping the overwhelming majority of firms from elevating their dividends yearly with out interruption.

When oil and gasoline costs are excessive, vitality firms get pleasure from a windfall that flows by way of to buyers. However when commodity costs decline, earnings evaporate, and in some circumstances, dividends as properly.

Consequently, there are simply two oil shares on the record of Dividend Aristocrats. One in all them, Exxon Mobil (XOM), is the most important oil firm within the U.S.

You possibly can obtain the total record of all 68 Dividend Aristocrats, with necessary metrics like dividend yield and price-to-earnings ratios, by clicking on the hyperlink beneath:

 

Disclaimer: Positive Dividend isn’t affiliated with S&P World in any method. S&P World owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet is predicated on Positive Dividend’s personal assessment, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person buyers higher perceive this ETF and the index upon which it’s primarily based. Not one of the info on this article or spreadsheet is official knowledge from S&P World. Seek the advice of S&P World for official info.

Oil and gasoline generally is a “boom-and-bust” {industry}. Earnings are extremely dependent upon commodity costs, which may fluctuate wildly in any given 12 months relying upon provide and demand forces.

However Exxon Mobil is totally different. It traces its roots to Customary Oil, which was based by John D. Rockefeller all the way in which again in 1870.

This text will present an in-depth have a look at the founding father of Huge Oil and a Dividend Aristocrat, Exxon Mobil.

Enterprise Overview

Customary Oil dominated the U.S. oil and gasoline {industry} in its early days. It did this with a laser-like concentrate on drilling innovation, manufacturing development, and limiting prices to beat its opponents. Customary Oil was virtually too profitable—it grew quickly that in 1911, it was dissolved by the U.S. Supreme Court docket on antitrust grounds.

Customary Oil was damaged up into 33 smaller firms, a lot of which grew to become giants on their very own, equivalent to Chevron (CVX).

Exxon Mobil operates in three enterprise segments. The Upstream section contains oil and gasoline exploration and manufacturing. Downstream actions embrace refining and advertising. Manufactured chemical substances embrace olefins, aromatics, polyethylene, and polypropylene plastics.

Exxon Mobil is likely one of the largest vitality shares on the earth. In early February, Exxon reported (2/2/24) monetary outcomes for the fourth quarter of fiscal 2023.

Supply: Investor Presentation

Because of a slight enchancment in oil costs, which resulted from manufacturing cuts of OPEC and Russia, Exxon grew its earnings-per-share sequentially 9%, from $2.27 to $2.48.

The costs of oil and gasoline have incurred a correction off their peak, however they continue to be elevated. Consequently, Exxon Mobil might nonetheless obtain earnings per share of about $8.40 this 12 months.

Development Prospects

The local weather for oil and gasoline majors stays challenged as a result of oil costs are nonetheless down by almost half from the height ranges of 2014. Consequently, oil producers can not depend on rising costs for income and earnings development. As a substitute, rising manufacturing shall be key. Because of its promising development initiatives, Exxon expects to develop its manufacturing from about 4.0 to five.0 million barrels per day by 2025.

The Permian shall be a significant development driver. In 2023 Exxon agreed to amass Pioneer Pure Assets (PXD) for $60 billion in an all-stock deal. As Pioneer is the most important oil producer in Permian, Exxon expects to greater than double its Permian output, to 2.0 million barrels per day in 2027.

Exxon Mobil expects to realize such an awesome efficiency primarily due to a steep discount in its common price of manufacturing, which can end result from the addition of low-cost barrels in its asset portfolio. The opposite development contributors shall be a discount in structural prices in addition to significant manufacturing development.

Guyana, one of the vital thrilling development initiatives within the vitality sector, shall be a significant development driver of Exxon. Over the last 5 years, Exxon Mobil has greater than tripled its estimated reserves within the space, from 3.2 billion barrels to about 11.0 billion barrels.

Notably, about 90% of the investments of Exxon Mobil shall be directed to reserves which are anticipated to yield an annual return in extra of 10% even at oil costs of round $35. Which means the oil large will high-grade its asset portfolio drastically within the upcoming years.

The EPS development plan of Exxon Mobil additionally features a share repurchase program of as much as $35 billion in 2023-2024. This quantity is ample on the present inventory value to scale back the share rely by ~7%.

However, given the excessive cyclicality of this enterprise, it’s affordable to anticipate a -4% common annual decline of earnings per share over the following 5 years off the record-high comparability base.

Aggressive Benefits & Recession Efficiency

Exxon Mobil enjoys a number of aggressive benefits, primarily its large scale, which gives the power to chop prices when occasions are robust. The corporate can also be the worldwide chief in experience in its enterprise, as most oil firms observe the technical procedures that Exxon Mobil has written.

Exxon Mobil additionally has the monetary power to speculate closely in new development alternatives. The corporate has allotted tens of billions of {dollars} prior to now few years on capital expenditures to help future development.

One other aggressive benefit is Exxon Mobil’s industry-leading stability sheet. It has a credit standing of AA-, which helps it maintain a low price of capital.

Exxon Mobil’s built-in enterprise mannequin permits the corporate to stay worthwhile, even throughout recessions and intervals of low commodity costs. The corporate noticed volatility in the course of the Nice Recession however nonetheless remained worthwhile:

• 2007 earnings-per-share of $7.26
• 2008 earnings-per-share of $8.66 (19% improve)
• 2009 earnings-per-share of $3.98 (54% decline)
• 2010 earnings-per-share of $6.22 (56% improve)

Persevering with to generate regular earnings allowed Exxon Mobil to boost its dividend yearly. The oil main has raised its dividend for 41 consecutive years.

Valuation & Anticipated Returns

Exxon’s {industry} is extremely cyclical. Commodity costs drive outcomes, and therefore they’re extremely unstable. We consider that the vitality market is now close to the height of its cycle and anticipate oil and gasoline costs to deflate within the upcoming years, primarily because of the file variety of clear vitality initiatives which are below growth proper now.

We anticipate Exxon Mobil to earn about $8.40 per share in 2024 and incur a -4.0% common annual decline of earnings per share over the following 5 years.

The inventory is presently buying and selling at a price-to-earnings ratio of 13.8. That is barely increased than our truthful worth estimate of 13 occasions earnings. A declining earnings a number of might scale back annual returns by 1.2% over the following 5 years.

Dividends will add to shareholder returns. Exxon Mobil has grown its dividend for 41 consecutive years and presently provides a 3.2% yield. Given all of the above elements, Exxon Mobil inventory might be moderately anticipated to supply a -2% common annual whole return over the following 5 years.

The poor anticipated return must be anticipated, on condition that we’re close to the height of the cycle of this extremely cyclical {industry}. We advocate promoting Exxon at its present value. The dividend yield of the inventory can also be close to a decade low, one other potential sign that the inventory is overvalued from a long-term perspective.

Ultimate Ideas

Exxon Mobil posted file earnings final 12 months due to exceptionally favorable international oil and gasoline situations. Even higher, as these situations should not prone to change considerably quickly, the oil main is anticipated to proceed thriving within the upcoming quarters.

However, because of the excessive cyclicality of this {industry} and the elevated valuation, XOM inventory is unattractive from a long-term perspective.

Additional Studying: The Chowder Rule | How To Calculate The Chowder Quantity.

Moreover, the next Positive Dividend databases comprise essentially the most dependable dividend growers in our funding universe:

If you happen to’re on the lookout for shares with distinctive dividend traits, think about the next Positive Dividend databases:

The key home inventory market indices are one other strong useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: