Ring the bell because it’s time for a dividend smackdown. The contestants: Oil major ExxonMobil Corporation (NYSE:XOM) and iconic American burger join McDonald’s Corporation (NYSE:MCD).
These stocks were not chosen at random; both are dividend achievers par exellence. ExxonMobil and McDonald’s have raised their dividends for 32 and 38 consecutive years, respectively, and both sport attractive current yields. At current prices, XOM pays a dividend of 3.3% and MCD pays a dividend of 3.5% — close enough to make it a virtual wash.
ExxonMobil Corporation (XOM)
XOM has taken a beating of late due to the collapsing price of crude oil. Its share price is down about 19% from its highs last year, and for the first time in a long time I can credibly say the stock is cheap. Its dividend yield is the highest it’s been in decades, yet its dividend payout ratio is still very modest 36%.
I realize that the dividend payout ratio will probably spike up in the coming quarters as Exxon’s earnings slow due to the rout in crude oil prices. But coming from such low levels, investors have a wide margin of safety here. And XOM has a long history of maintaining and even raising its dividend under very difficult conditions in the energy markets.
As I wrote late last year, XOM continued to pay and raise its dividend throughout a 20-year bear market in energy. Dividend growth slowed a little … but surprisingly, not all that much.
It’s easy to keep your payout stable when your balance sheet is as rock-solid as Exxon’s. Its debt-to-equity ratio is a very modest 16.1%, and XOM is one of only three companies in America to have its debt rated AAA by Standard & Poor’s. The other two are Microsoft Corporation (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ).
XOM has also managed to maintain impressive profitability for an old-line behemoth from the 19th century. Its return on equity has averaged about 26% over the past 15 years.
Has Exxon’s stock price bottomed out yet? Maybe. Maybe not. Investor sentiment is pretty sour towards the oil majors right now, so a lower price is a real possibility. But at these prices, it’s safe to start averaging in and reinvesting your dividends.
McDonald’s Corporation (MCD)
McDonald’s is another stock that has failed to impress investors of late. McDonald’s has seen its domestic sales battered by a move by consumers to eat healthier, fresher food. MCD has become something of a punching bag for all that is wrong with fast food and the primary scapegoat for American obesity. And international revenues have been dinged by a sharply rising dollar.
I expect MCD to sort through its problems — eventually. It’s been here before, and it’s made the adjustments it needed to make to stay relevant. But these kinds of transformations don’t happen overnight, and they often involve significant cash-sapping investment in the meantime.
I also expect MCD’s dividend growth to slow down over the next several years. McDonald’s has outpaced ExxonMobil over the past decade, but it also has a much higher dividend payout ratio at 68%.
MCD is a fine stock. In fact, I currently have it on my watch list. But for the immediate future, XOM looks like the safer bet.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he was long XOM
