Anyone looking to start a position in Exxon Mobil Corporation (NYSE:XOM) at current levels should probably think again, because XOM’s dividend growth streak could be in danger.
In addition to being a component of the Dow Jones Industrial Average, XOM is a member of the S&P Dividend Aristocrats. That’s because it has increased its dividend for 34 straight years. As any dividend investor knows, hikes build up to deliver outsized yields on an initial-cost basis. But now there’s reason to worry that the track record of payout growth could break.
At 3.5%, the current yield on the Exxon dividend is fairly attractive in today’s low-rate environment. You can see how equity income investors would gravitate toward this august blue-chip name. If something happens to the payout stream, however, look out.
Persistently low oil prices are making it harder and harder to come up with the dividend. Indeed, it’s paying out more in dividends than it’s making in profits and making up the difference by selling debt. As a result, the XOM dividend has become a key talking point among Wall Street analysts. Here’s some commentary from Oppenheimer equity research:
“Exxon had a $7.3B operating cash flow shortfall last year and, based on consensus estimates, is expected to face a cash flow deficit of $6.1B this year, but to have an operating cash flow surplus of $7.1B next year. Based on prices of $43.39/b in 2016 and $53.62/b in 2017 for WTI crude, $45.37/b and $55.53/b for Brent crude, and $2.50/mcf and $3.11/mcf for Henry Hub natural gas, consensus earnings estimates are $2.19/share this year, down 43% from last year, and $4.30/share next year, or a 96% increase. Growing dividend is becoming increasingly challenging.”
XOM Has More than Cash Concerns
But the Street isn’t concerned with XOM’s ability to maintain its streak of dividend growth.
Analysts at Goldman Sachs are telling clients that it’s an inferior investment compared with peers:
“For ExxonMobil, what is becoming increasingly difficult to see is what moves shares higher from here. While we are excited about the progress in Guyana and the company’s exploration program, we see better risk/reward to Buy-rated Hess (HES) (on the Conviction List, covered by Brian Singer) on this theme. While we believe that ExxonMobil and its XTO arm can compete and deliver value in the US shale, the company has been hesitant to make a major E&P acquisition to highlight this value or provide the same level of disclosure that Chevron has now provided on its Lower 48 program. While we continue to see the company’s refining and chemicals business as world class, the global refining and ethylene cycles likely peaked in 2015, and we see the markets as well-supplied moving in 2017/2018.”
With those issues and more, Goldman thinks XOM’s fellow Dow stock Chevron Corporation (NYSE:CVX) is a better choice for both price appreciation and dividend-hike security.
Here’s GS’s thumbnail investing thesis:
“Chevron offers a better rate of change story on cash flow and production moving into 2017/2018. We forecast relatively range-bound oil prices from 2017-2020 at $50-$60/bbl WTI. In that environment, where we do not see major commodity price swings, we believe idiosyncratic stories will be the key to generating alpha among the integrated oils and refiners. On that basis, Chevron offers a better ‘rate of change’ story, with the Chevron better positioned to grow production, accelerate free cash flow and increase relative returns vs. ExxonMobil.”
The market generally agrees with the CVX rather than XOM story. Exxon Mobil’s price target gives the name implied upside of 4.5%. CVX, however, has implied upside of over 6%.
Of course the biggest reason to favor Chevron over Exxon is uncertainty surrounding its capacity to grow its dividend. Even if XOM is able to keep raising it up through this long cycle of low oil prices, investor anxiety over it will be a headwind for stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.