It has been claimed that Russia and Saudi Arabia are purposely suppressing the oil price. This has placed enormous pressure on American oil-sector companies and their shareholders. A prominent example of this would be Exxon Mobil (NYSE:XOM) stock.
There might be some consolation in the form of dividend payments. Exxon Mobil is known to be a strong and consistent dividend payer. Still, investors must weigh this against the potential for further share price declines. Is the risk-reward balance favorable?
The Knowns and Unknowns
As an informed investor, it’s a smart idea to focus on what you know to be true and avoid getting hung up on what’s unknowable. For instance, we can’t know what Russia or Saudi Arabia will do next in the oil-price tug-of-war. There’s not much point in trying to predict that.
Here’s what we do know for certain. Exxon Mobil is a component of the Dow Jones Industrial Average. It’s one of the biggest companies on the planet. Moreover, for dividend-stock investors, the company has been quite generous. Some folks would call Exxon Mobil a dividend “king” or “aristocrat” as the company has raised its dividend payouts very consistently.
To be specific, Exxon Mobil has increased its dividend payments for an astonishing 37 consecutive years. Only companies with some measure of staying power can reach a milestone like that. Income-oriented investors crave this level of consistency.
But it gets even better, as Exxon Mobil’s forward dividend yield is a dazzling 10.11%. In theory at least, that would represent a 10% buffer against a year’s worth of share-price downside. Plus, XOM stock seems to represent decent value with a trailing 12-month price-to-earnings ratio of just 9.75. These numbers appear to indicate a solid buy-and-hold investment.
Maintaining Value Through Cost Cutting
Some investors might worry about Exxon Mobil’s ability to maintain such a robust dividend. Social-media debaters have argued over whether the company will be forced to slash its dividend payouts, thereby ending a long-standing streak of dividend increases.
This concern might be overstated. Exxon Mobil is taking an important step in protecting its ability to pay healthy dividends. Specifically, the company has pledged to make significant reductions in its spending.
Fiscal discipline is a hallmark of mature companies as it helps to ensure their longevity. To this end, Exxon Chief Executive Darren Woods suggests that the company is weighing cost-cutting measures as a long-haul strategy:
“We are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term … We remain focused on being a safe, low-cost operator and creating long-term value for shareholders.”
If Exxon Mobil can keep costs low during these challenging times for the energy sector, dividend cuts might be entirely unnecessary. As Tudor, Pickering, Holt & Co. analyst Matt Murphy states, “Protecting the balance sheet and dividend is the priority for this company.”
Murphy considers a dividend cut unlikely. That’s a reasonable belief as Exxon Mobil has the option of reducing its spending in American shale oil. That cost-cutting measure would reduce the need to slash dividend payments.
Moreover, as Raymond James analyst Pavel Molchanov suggests, it simply isn’t in the company’s interest to punish loyal shareholders. “Cutting the dividend would discourage income investors,” states James.
The Takeaway on XOM Stock
Nothing in the markets is 100% guaranteed. However, XOM stock’s dividend appears to be fairly safe. The share price could suffer if the oil price declines further. However, there’s little value to be gained from trying to predict the unpredictable. With financial discipline, Exxon Mobil should be able to weather the oil-price storm.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
