With the price of WTI crude oil having traded in a range between $50 and $60 for quite some time, it’s easy to forget that the price is down around 27% since peaking last October. Exxon Mobil (NYSE:XOM) stock isn’t exactly outperforming either, as it’s down 12% for the past 12 months and has trailed competitor Chevron (NYSE:CVX) by 11% during that time.
That lagging performance has turned some analysts bearish on Exxon Mobil stock, but I don’t see things like most other people do. If anything, the price differential between XOM stock and its competitors is one of the strongest reasons to start a long position in one of the petroleum industry’s biggest and best-known mega-corporations of our lifetime.
Buy and Hold XOM Stock for Terrific Dividends
It always bothers me when analysts completely ignore dividends and only focus on the price action of a stock. Dividends, as Warren Buffett has reminded us many times, are one of the keys to long-term wealth accumulation for smart investors. And if any company deserves to call itself a dividend aristocrat, it’s Exxon Mobil.
For a basis of comparison, we can compare the dividend payout of XOM stock to its chief rival, CVX. Chevron’s dividend yield is quite decent at 4.1%, but Exxon Mobil is the clear winner in that category at 5%. It’s also worth noting that while Chevron’s dividend payout ratio (defined as the company’s dividends per share divided by its earnings per share) is a perfectly respectable 58%, Exxon Mobil wins again with a dividend payout ratio of 76%, which is simply outstanding.
An Analyst Weighs in
It’s all over the financial news that famous British bank and analyst firm Barclays has given Chevron an overweight rating while they’ve only given Exxon Mobil stock an equal weight rating. That’s the equivalent of declaring that CVX is a much better buy than XOM stock right now. I don’t concur with Barclay’s unfavorable comparison of Exxon Mobil as a long-term portfolio allocation.
In defense of her position, Barclays analyst Jeanine Wai explained in a note that Chevron is well-positioned to return significant free cash flow. This brings me back to my previous point, which is that a very healthy 5% dividend yield is precisely what I would call a “significant” flow of cash to shareholders. This is cash deposited into my brokerage account, which I will gladly collect and reinvest right back into more XOM stock.
Wai also projects that drilling in the Permian Basin will provide positive cash flow for Chevron in the first quarter of 2020. However, Exxon Mobil is also aggressively drilling in the Permian Basin, with a cash-flow-positive target of 2021. The target is bit later than Chevron, but also a realistic timetable. In any case, no one is doubting that Exxon Mobil has plenty of capital available to drill in the Permian, and the company is planning to produce the equivalent of around 1 million barrels of oil from the region per day. Clearly, there’s no slowing down for XOM regardless of the stock price.
The Bottom Line on Exxon Mobil Stock
As Wai correctly observed, “Energy is currently one big ‘Show-me Story,'” suggesting that it’s up to each company individually as well as the sector as a whole to prove themselves and justify higher stock valuations. Just as oil itself has been under price pressure in the past year, XOM stock needs to dig itself out of the hole it’s created. And that’s going to require lots of capital and a strong focus on the Permian. A rebound in the price of crude oil certainly wouldn’t hurt, either.
I believe that all of these issues will resolve themselves in the near future and Exxon Mobil stock shares will rebound sharply. Most importantly, unlike a certain British analyst, I don’t feel the need to compare XOM to any of its rivals. It’s a great company on its own, and shareholders can purchase shares with confidence, enjoy the dividends and profit handsomely when the oil price eventually breaks out.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
