Blue Chips to Pass On: Exxon Mobil (XOM)
Some folks have always considered Exxon Mobil (XOM) the ultimate buy-and-hold investment because it’s one of the largest companies in the world. And it’s highly unlikely XOM is going anywhere considering:
- It’s valued at over $420 billion in market cap, making it the second-largest U.S. stock by this metric behind Apple (AAPL).
- It’s at the top of a capital-intensive energy exploration industry, where regulation and barriers to entry are high.
- It is one of four companies — along with ADP (ADP), Microsoft (MSFT) and Johnson & Johnson (JNJ) — that boast the ultimate AAA credit rating for its debt. It also sits on $5.3 billion in cash and another $37 billion in long-term investments to boot.
- Exxon has paid dividends since 1882 and has increased its payouts once a year dating back 31 years.
Sounds like a lock for any long-term portfolio, right?
Well, the issue with XOM stock is that while energy consumption is growing in some emerging markets, efficiencies in the West have resulted in flatlining or even dropping demand. Consider that oil consumption in the U.S. recently fell to a 16-year low as just one data point of note.
Consequently, XOM has seen its stock basically go nowhere since 2008.
But even more troubling is Exxon’s payout of dividends. While its dividend growth has been consistent and substantive — with payouts up 133% from 27 cents a quarter in 2004 to 63 cents quarterly currently — its dividend payout rate is anemic. The company is forecast to make about $8.20 per share in FY2014 earnings but pay out $2.52 in dividends for a miserly 30% payout ratio.
You can argue that makes dividends sustainable, but at a headline yield of just 2.6%, Exxon is paying less than 10-year Treasury notes.
If you bought XOM stock a decade ago and have a great cost basis, there’s reason to hang on. But why throw new money at this cheap dividend payer when overall energy demand remains pressured and shares have been sluggish for several years now?