Exxon Mobil: undisputed Dividend King. Buy !

On 02 Feb 2024, $Exxon Mobil(XOM)$ reported its second-highest year of earnings over the last decade.

Looking at its results, there could be even more growth to come in the years ahead?

Exxon's record earnings in 2022 were a bit of an outlier.

This was because oil prices have surged:

  • In response to Russia's invasion of Ukraine.

  • Geopolitical tensions.

  • Strong demand.

Yet in 2023, things took a drastic change with lower oil and gas prices.

Could this be a glimpse into the future of what's to come for Exxon?

On the contrary.

Exxon has been laying the groundwork for sustained earnings growth.

A lot of it has to do with (a) cost reductions and (b) portfolio improvements.

In addition, Exxon is also putting capital to work and boosting production from high-quality assets.

Exxon's 23 Oct 2023 acquisition of $Pioneer Natural Resources(PXD)$ is expected to close in Q2 2024.

The purchase, paired with a whopping $26.325 Billion in capital and exploration expenditures last year, paves the way for a ramp-up in global project development, with several milestones expected in 2025.

Five reasons why ExxonMobil is a terrific dividend stock to buy now.

1. Cash rich.

Exxon's earnings were the headline figure from its latest earnings.

However, cash flow is even more impressive. (see below)

  • At year end (YE) 2022, cash flow was $29.7 Billion.

  • In 2023, Exxon made $55.4 Billion in cash flow from operations and $4.1 Billion from asset sales.

  • Exxon spent (a) -$23.4 Billion on capital expenditures, (b) -$1.8 Billion on other expenses and distributed (b) -$32.4 Billion to shareholders through dividends & buybacks.

  • This left Exxon with a balance of $1.9 Billion.

  • Add to its 2022 cash flow balance ($29.7 Billion), at year end (YE) 2023, cash flow was $31.6 Billion.

Exxon is poised to generate even more cash once it fully integrates Pioneer and continues to develop some of its longer-term downstream projects, Guyana production, and liquefied natural gas projects.

2. Structural cost savings.

On 6 Dec 2023, Exxon released a corporate plan for the next 3 years (to 2027). (see below)

One of the plan's key components is cost savings:

  • Of $15 Billion between 2019 and 2027.

  • With $9 Billion in savings expected between 2019 and 2023.

Exxon exceeded that goal, reporting $9.7 Billion in structural cost savings between 2019 and 2023.

Of which, $2.3 Billion in savings were realized in 2023; and $700 Million from Q4 2023 alone.

Operating a more efficient business by reducing costs, help boost returns, that could fuel accelerated growth.

More importantly, cost reductions give an added cushion for the next downturn.

3. Balance sheet - near-perfect.

  • In 2023, Exxon has a debt-to-capital ratio of only 16%.

  • Its lowest level in the last 8 years.

  • Exxon lowered its long-term debt position by 7.6% to $37.48 Billion and raised its cash position by 6.4%.

  • Exxon ended FY 2023, with a net debt position of $5.9 Billion, its lowest over a decade.

In capital-intensive industry like Oil & Energy, having a strong balance sheet is very important.

Case in point, during Year 2020 pandemic downturn — Exxon was able to fund its operations and grow its dividend despite losing money.

This was because it was able to leverage its balance sheet.

Although unsustainable, the strategy worked because it enabled Exxon to get out of a jam.

Fast forward a few years, Exxon is in a much better shape than it was before the pandemic.

4. Healthy capital return program

In Q3 2023, Exxon raised its dividend to $0.95 per share, making it its 41st consecutive annual increment.

The company raises its dividend by a few percentage points a year.

Over the last decade, Exxon stock is up +13.6%, while its dividend is up > 50%.

As a result, it's yield is relatively high at 3.7%.

However, it is ExxonMobil’s buyback that makes the capital return program attractive.

In 2023, Exxon spent:

  • $14.9 Billion in dividends.

  • $17.4 Billion in stock buybacks. This effectively reduced its outstanding share count by 3.6%.

Advantages of Buybacks: (for investors & company) see below:

5. Upping its ante on low-carbon investments.

Exxon's excellent results, growth trajectory, cash flow, dividend, buybacks, and financial health all play into the long-term investment thesis.

So is its energy transition initiatives.

Exxon vow to achieve net-zero emissions by 2050.

This sounds unlikely, coming from an oil and gas company.

To that end, Exxon has made strides in:

  • Reducing flaring.

  • Cleaning up its operations.

  • Investing in low-carbon solutions, carbon capture and storage.

In its corporate plan through 2027 (see above point #2), Exxon has announced that it is pursuing more than $20 Billion in lower carbon opportunities.

Exxon is investing to achieve its sustainability targets and to make money. It expects to generate returns of around 15% from its low-carbon investments.

Just in November 2023, Exxon completed its $4.9 Billion acquisition of $Denbury Inc.(DEN)$ that uses unique oil extraction method (injecting carbon dioxide into oil reservoir), storing CO2 along with getting more oil from a depleted reservoir.

Exxon is investing in low carbon mainly through the oil and gas industry instead of renewable energy like solar and wind.

The Complete deal.

Reason why ExxonMobil is a good value stock is because of above reasons discussed.

Add to that, its price-to-earnings (P/E) ratio of just 11.5, is less than half of the S&P 500's P/E ratio of 26.9.

Exxon does not need a super high oil price to check all the boxes.

It can simply pull back on buybacks if oil prices fall.

Should there be a brutal downturn, it can emulate its 2020 action plan and lean into its balance sheet.

Any other worries?

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