Exxon (NYSE:XOM) announced on April 7, 2020, that it would reduce capex and spending. XOM stock now has an attractive 8.25% dividend yield. And the actions the company took made that dividend much more secure.
Exxon will produce its first-quarter earnings on May 1, 2020. Typically the company announces the dividend for the quarter a few days earlier. So investors can expect to hear about the dividend around April 28 or 29.
In its announcement, Exxon said it would cut its capex to $23 billion from the previously announced $33 billion. But Exxon spent $24.36 billion last year in capex. So this is a cut of just $1.36 billion, or 5.6% of capex.
Free Cash Flow, Plus Debt and Asset Sales Could Cover the XOM Stock Dividend
In addition, Exxon said it would cut its expenses by 15%. Cash flow from operations (CFFO) was $29.7 billion last year. I estimate that CFFO will be lower by at least 15%, given the drop in oil and gas prices.
Moreover, free cash flow was $5.36 billion. And with an additional $5.2 billion in assets and other sales, the total adjusted FCF was $10.5 billion. Exxon’s revenue this quarter is likely to be down at least 15%, so the cut in expenses by 15% helps ameliorate the expected reduction. In addition, the cut 5.6% cut in capex will help keep FCF at a level where it could cover the dividend.
For example, last year the annual dividend cost about $14.6 billion. With additional borrowings, the company was able to pay the dividend last year. So going forward, I suspect that Exxon would still have to sell assets and incur debt to continue to pay the dividend.
This all depends on how strong its free cash flow will be going forward, which we will find out about on May 1.
Last week, Barron’s reported that Exxon was among three companies that borrowed $17 billion. Exxon issued $9.5 billion of corporate bonds as of April 13, 2020. As Barron’s described it, it provides the company with a “war chest” to fight the novel coronavirus. This was on top of the commercial paper it was able to borrow in March.
Will Oil and Gas Prices Rise Again?
Last week Texas regulators held hearings on whether they should use their authority to curtail production. According to the Wall Street Journal, only the Texas Railroad Commission, not federal regulators, has the legal power to cut production in Texas.
This came after OPEC and its oil-producing allies reached an agreement to cut 9.7 million barrels of oil a day on April 12. CNBC reported that the U.S. Energy Secretary, Dan Brouillette, said that oil prices, after having fallen 55% year-to-date, may have finally reached a bottom.
That is also more likely now that many countries are finally looking to turn on their economies in the next month or so. This will increase consumer and business demand for energy, including oil and gas. As a result, prices will be more likely to rise.
This is also what Exxon is counting on. It was not one of the companies that wanted the Texas regulators to curtail production, according to the Wall Stree Journal.
What Should Investors in XOM Stock Do Now?
The better part of prudence would call for investors to wait until the end of April to see if the XOM dividend is retained. One issue is whether or not the company decides to keep the dividend but cuts it.
As you can tell from the numbers that I provided above, the company has to borrow and sell assets in order to maintain the dividend. That is because FCF is not sufficient to pay for it outright at the present.
But here is the thing. On April 7, 2020, Exxon CEO Darren Woods came on CNBC’s Squawk Box program. He committed on that news show that Exxon was committed to maintaining its dividend. But, again, “maintaining” the dividend does not necessarily preclude a cut.
At the time, XOM stock was at $42.73. Today it is at $42.22 per share. So the market tends to believe him. I suspect you can take the CEO at his word. The dividend yield, at today’s price, is 8.25%, which is very attractive.
So, assuming that oil prices rise, that Exxon’s FCF, asset sales and debt raise cover the dividend and assuming you take the CEO at his word, the yield is a good bargain.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
