The assumption of many investors is that as oil goes, so goes the stock of Exxon Mobil Corporation (NYSE:XOM). But, that’s not true, at least not so far in 2017.
While the price of oil has fluctuated wildly this year, and now sits 8.55% below where it started, shares of the oil giant have remained fairly stable, falling in price early in the year when prices were highest, and holding up through oil’s dips.
As our Vince Martin wrote recently, XOM stock is not going anywhere any time soon. But, this does not mean it’s unattractive to all investors. Income investors will appreciate the 77 cents per share dividend, now yielding 3.79%. That’s still significantly more than you’ll get with 30-year U.S. Treasury bonds.
Management increased that dividend this year, from 75 cents, despite failing to match the dividend with earnings in 2016. They’re confident in the payout, and you should be, too.
Exxon Investing Downstream
As I noted in my own review of the first quarter, Exxon is earning more money this year while pumping less oil. It is investing heavily in its “downstream” operations, in refining and marketing, and also with a new chemical plant it is building with Saudi help near Corpus Christi and a plastics plant expansion it just opened near Houston.
The fate of Exxon stock is tied less to oil than to Trump. Former CEO Rex Tillerson is now Secretary of State, and the company’s priorities in international production and domestic refining are in line with those of the Administration.
Exxon management is betting that Trump can keep prices high enough, with downstream margins sufficient to justify the recent dividend hike and continuing investment. Still, that depends on making peace with OPEC, which was the real aim of his recent trip to the Middle East.
Stability in the oil price could thus fuel a rally for energy stocks, including XOM stock as well. Chart-watchers seem optimistic, and in that case, income investors might be advised to get in now.
The Longer Term
The longer-term trends are not nearly so sanguine for Exxon Mobil. These can be summed up in two words: electric cars.
Even if electrics use more natural gas, a prime electricity feedstock, than cars using gasoline, they have far fewer moving parts, and are expected to equal gas-powered cars in total cost of ownership as early as next year.
All they really need to achieve this is mass production, and the move early this decade to raise Corporate Average Fuel Economy (CAFÉ) standards to 60 miles per gallon for passenger cars by 2025 essentially guarantees the mass production of electrics long before that date.
The growth of autonomous cars, which could both cut consumer demand for new vehicles and cut the employment of drivers whose income fuels the economy, creates uncertainty in the fuel markets the likes of which haven’t been seen in many decades.
The replacement of Ford Motor Company (NYSE:F) CEO Mark Fields this week with the head of its autonomous car unit, Jim Hackett, is also seen as bullish for both self-driving and autonomous vehicles, despite the fact that Hackett’s key experience was as head of office products company Steelcase and his most recent job before Ford was as athletic director at the University of Michigan.
The Bottom Line for XOM Stock
The bottom line today remains just as it was in February — Exxon Mobil is a stock you buy for income, not for growth.
The recent weakness in XOM shares has been a great buying opportunity for investors, and speculation leading to a slightly higher stock price will close off that opportunity.
If you’re going to get into XOM stock, in other words, it’s best you get in now.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F.
