Who wants to buy ExxonMobil (NYSE:XOM) stock? Oil prices have hit new lows. People working from home due to the coronavirus from China means lower demand. A coronavirus-driven recession could dent demand further. Yet, this could be the recipe for a great contrarian buy.
But there’s a clear difference between a shrewd contrarian play and foolishly betting against the crowd. You can lose big buying while others are selling. Yet, you can see big upside if you buy once everyone’s sold. Is that the case with ExxonMobil shares?
Granted, near-term results aren’t going to be pretty for XOM stock. With the price of crude oil falling more than 50% in one month’s time, you can’t expect good results. Coupled with demand drying up, it’s hard to see near-term upside.
In the case of this stock, however, it could be darkest before the dawn. Over-leveraged exploration and production companies, like Occidental Petroleum (NYSE:OXY), face greater challenges. But integrated names like ExxonMobil, with stronger balance sheets, could better weather the storm.
On a forward price-to-earnings (P/E) basis, XOM stock isn’t the cheapest integrated oil play. Weighing all these factors, it’s tough to say whether shares are going to rebound dramatically or tread water in the near-term. Let’s dive in and see what the verdict is.
What’s Next For XOM Stock?
It’s hard to predict future moves in oil prices. To use cliche business jargon, there’s a lot of moving parts. Beyond the supply/demand dynamic, there’s the geopolitical factor. Oil prices could rebound once the Saudi Arabia-Russia oil price war ends. Yet, even with some saying the Saudi’s gambit may backfire, that’s not to say they’ll quickly change course.
But going long ExxonMobil today doesn’t have to be a bet on higher oil prices. Even if prices don’t rise back up to prior levels, the company could still maintain its dividend, weather the storm, and deliver upside for investors entering the stock today.
How? By taking proactive moves to protect itself. As InvestorPlace’s David Moadel discussed March 23, ExxonMobil’s management is slashing costs and capital expenditures. Such moves bolster its balance sheet. They also help to conserve cash. This could help reduce the chances of dividends taking a hit.
Or does it? Ratings firm Standard & Poor’s (S&P) recently downgraded the company’s debt. 2019’s cash flow failed to cover its $14.7 billion in dividend payments that year. With cash flow expected to drop, they will be in even less of a position to maintain their current high payout. S&P may cut their debt rating again if the company “continued to return cash” in amounts “beyond internally generated cash flow.”
In short, ExxonMobil is making the right moves. But these decisions may fail to drive a rebound in shares. Much of this could already be priced into the stock. Considering valuation, however, shares aren’t exactly a deep value play.
Fair Valuation Relative to Peers
Looking at forward P/E multiples, ExxonMobil is far from being the cheapest integrated name on the block. Shares now trade for 11.2 times forward earnings. That’s way below Chevron’s (NYSE:CVX) forward multiple of 45.8 and below BP’s (NYSE:BP) forward multiple of 22.9.
So why isn’t XOM stock trading at lower multiples? The company status as a “dividend aristocrat” may have something to do with it. With 37 years of consecutive dividend growth, investors are still banking the company won’t cut its dividend. But the dividend’s payout ratio is currently 227%!
In other words, it looks highly unsustainable. Investors have priced this in, as the dividend yield is now over 9%. In a low-interest world, such a yield looks tempting. But when a dividend stock has such a high forward yield, investors are anticipating a haircut.
If the company capitulates and cuts its dividend in order to satisfy debt rating agencies, all bets are off regarding future price action. It would be an unprecedented move, but nothing lasts forever. In a world where blue chips like General Electric (NYSE:GE) have imploded, ExxonMobil is not made of teflon.
Consider Other Blue Chips for Your Rebound Plays
ExxonMobil may have a stronger balance sheet than some of its oil patch peers. But that’s hardly a reason to buy, even at today’s depressed prices. The company is making the right moves to help conserve cash. But as ratings agencies look unkindly to their high dividend payouts, a cut could still be in the cards.
Bottom line? I don’t see XOM stock falling further. But I also don’t see it retracing its high water mark. Considering other blue-chip names that could quickly rebound, stay on the sidelines with this stock, and pursue more solid opportunities.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.