ExxonMobil (NYSE:XOM) stock continues to decline. Despite its massive $301 billion market cap and growing dividend yield, XOM has failed to move higher since the oil price slump that began in 2014. It now trades below its level in early 2016 when oil prices bottomed.
However, XOM stock has now begun to look like a value play. Its dividend yield has risen to levels more than double that of the S&P 500 average, and its multiple remains low.
With a stable, growing dividend, Exxon stock has set itself up to become an income play now and a likely growth stock in the foreseeable future.
XOM Continues to Decline
When looking at the charts, XOM stock may seem like a strange choice. Since peaking at $104.61 per share in the summer of 2014, ExxonMobil has seen a steady downtrend.
Interestingly, the stock has fallen more than 10% since oil prices bottomed near the $26 per barrel level in early 2016. Oil now trades at around $56 per barrel. ExxonMobil trades at about $71 per share as of the time of this writing.
Has it finally bottomed? Time will tell, though the forward price-to-earnings (PE) ratio now stands at about 15.6. Profits have also fluctuated. Analysts forecast a 32.2% drop in earnings this year. However, they expect that to rebound in fiscal 2020, growing 37.5%. Also, the projected five-year average profit growth rate of 9.7% per year points to a strong, if unsteady, rate of growth.
Exxon Stock and Income Investors
However, the stock may find its stabilizing influence in the dividend. At an annual payout of $3.48 per share, the yield has now reached 4.9% thanks to the drop in the XOM stock price. Moreover, the company achieved dividend aristocrat status (meaning a 25-plus year streak of payout hikes) years ago.
The record of dividend increases for XOM stock now stands at 36 years.
It can maintain this payout since ExxonMobil also participates in the refining and retailing of petroleum-based products. It does not resemble a ConocoPhillips (NYSE:COP) which participates only in the upstream market or a Valero (NYSE:VLO) which only refines and sells gasoline. This builds in some degree of stability regardless of oil prices.
This explains why payout hikes have survived deep slumps in the oil market. This includes 1999 when oil prices fell to the $10 per barrel range, the 2007-09 financial crisis, and the 2014-16 decline in oil prices. The fact that payout hikes continued under such conditions makes the Exxon stock dividend one of the safest around.
Admittedly, at 80.24%, the dividend payout ratio has turned high. However, it still means that the company can pay the dividend out of its profits. Moreover, ending dividend increase streaks usually devastates stocks for years. Hence, in all likelihood, the dividend increase streak will continue next spring despite these challenging conditions.
Fossil Fuel Will Remain Important
Longer-term threats to the company also appear overblown. Despite all the talk about electric vehicles, wind, and solar power, these niches remain a tiny fraction of the energy market. And this comes after decades of focus on alternative energy.
Since winds do not deliver a steady breeze and the sun does not always shine on solar panels, alternative energy depends on batteries. However, the impact on the environment created by lithium batteries reduces the chances they will replace fossil fuels.
Furthermore, despite such talk InvestorPlace contributor Faisal Humayun points out that analyst forecast global energy demand to rise 20% by 2040. James Brumley mentions the recent oilfield discovery in Guyana as well as the company’s ever-increasing focus on the Permian Basin. All of this points to a continuing revenue stream for ExxonMobil, business that should sustain the XOM stock dividend, and ultimately, Exxon stock itself.
The Bottom Line on Exxon Stock
XOM stock looks like a buy for income, and eventually, growth investors. Yes, the equity has remained in an overall downtrend since 2014. However, this has taken the dividend yield to almost 5% and its forward PE ratio to 15. Combine that with the need for a payout hike to maintain the dividend aristocrat status, and investors have a stabilizing influence in Exxon stock.
Moreover, the move toward alternative energy has not turned the world away from fossil fuels. With oil discoveries continuing, these trends should continue to pad the bottom line of XOM stock for years to come.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
