Exxon Mobil (NYSE:XOM) is in the midst of a 37% rally off its 52-week low. Still, shares of Exxon Mobil stock are lower by more than 50% over the past year and with oil prices sagging, it’s easy to understand why some investors aren’t flocking this or plenty of other energy equities.
West Texas Intermediate (WTI) futures closed just over $25 a barrel recently, but that’s not nearly enough to get most market participants excited about the moribund energy sector, a group seeing its heft in the S&P 500 consistently dwindle.
At $25-ish per barrel, WTI is off 56% since the start of 2019 and at that price point, most producers, including Exxon, are staring at a scenario where break-even prices are far off.
As note above, this isn’t your grandfather’s energy sector. The group now accounts for just 2.77% of the S&P 500 with only materials commanding a smaller weight among the 11 GICS sectors.
Until last year, XOM was a top 10 member of the benchmark U.S. equity gauge since, well, forever. These days, there are 25 stocks with larger S&P 500 weights than and it seems like just a matter of time before Netflix (NASDAQ:NFLX) surpasses the oil giant in the index.
A confluence of factors driven by the novel coronavirus, the weakening global economy, slack demand and increasing adoption of renewable energy make XOM risky, but as markets adjust to new a normal for traditional oil producers, the stock could be worth nibbling at.
Exxon Mobil Stock Dividend Is Safe
As of April 7, a dozen of the world’s largest oil companies pared 2020 spending plans by a combined $43.6 billion due to flailing prices and the coronavirus. A hefty chunk of that $43.56 billion – $10 billion to be precise – is attributable to Exxon, which pared its 2020 budget by 30% and its cash operating expenses by 15%, but preserving its dividend.
A big impetus for the spending cuts is maintaining the dividend – XOM stock yields 8.44% – one that has been raised for 37 consecutive years.
“Our objective is to continue investing in industry-advantaged projects to create value, preserve cash for the dividend and make appropriate and prudent use of our balance sheet,” said Exxon Mobil CEO Darren Woods in a statement.
Without getting too bogged down in semantics, “preserve” is much different than “grow” and as seasoned dividend investors well know, dividend growth is the name of the game. For the XOM payout right now, the long and the short of it is it’ll be maintained, but any hike to keep the increase streak alive – if it arrives at all – will be nominal.
Adding pressure on XOM stock is the refinery business. With the coronavirus punishing demand, there’s not to be had in the way of refining profits. In fact, some refineries are shutting down while others are cutting rates because demand is plunging.
Bottom Line on XOM Stock
It almost feels odd to say regarding a company that’s as old as Exxon, but if the company to adjust to market forces, it will survive and potentially thrive even against a challenging longer-ranging backdrop for oil.
Crude isn’t the economic growth harbinger it used to be and growing economies aren’t as reliant on as Western nations were in the 20th century, according to a Stanford University study. Likewise, Colombia University notes global population growth will slow in the coming years, reducing automotive purchases and travel, in turn pressuring oil demand.
Conversely, forecasts of oil’s death aren’t uncommon and there are scenarios under which its demand goes to zero. Exxon has the ability to adapt with the times and get back to rewarding investors. It could take a while for that story to unfold, but if the dividend is sustained, small positions are worth considering with this name.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
