Covid 19 has weakened demand for oil resulting in declining production and prices. Hence, industry stalwarts such as Exxon Mobil (NYSE:XOM) have taken a beating. However, with a focus on cost-reduction, debt management, and dividend expansion, Exxon Mobil stock is still worth investing in.
Second-quarter results were expectedly poor but highlighted the company’s priorities of streamlining its operations going forward.
“The progress we’ve made to date gives us confidence that we will meet or exceed our cost-reduction targets for 2020 and provides a strong foundation for further efficiencies,” Exxon Mobil CEO Darren Woods said.
With the continued efficiencies of scale, producing costs will continue to drop, increasing profitability.
Dividend Coverage and Exxon Mobil Stock
Exxon Mobil has been one of the high yielding dividend stocks in the energy sector. It currently has an impressive dividend yield of 8.9% and a five-year dividend growth rate of 4.6%. However dividend coverage is a matter of grave concern in the current scenario.
Belt-tightening measures have pushed cash and cash equivalents to $13 billion in its most recent quarter. Additionally, it also has access to a $12 billion credit line. However, its free cash flows of $1.7 billion net-off its capex fall short of its $3.7 billion dividend payments for the quarter.
Therefore, dividends are underfunded by its cash flows this year. However, I suspect that Exxon would get close to funding its dividend with its firm commitment to its capital allocation priorities.
Capex will be slashed by 30% in 2020 and, with improvements in oil prices, things will get better. Till then, the company would have to swallow the bitter pill of funding its dividend payouts from debt. In April, it raised $9.5 billion in new debt to load up on cash. Nevertheless, in the long run, the company will be in a much better position.
The Problem with the S&P 500
Exxon’s time is up on the Dow Jones Industrial Average, an index it entered over 90 years ago. S&P Global decided to remove XOM stock from the index and replace it with Salesforce.com (NYSE:CRM). Salesforce.com currently has a much larger market capitalization compared to XOM and is trading at a massive $255 per share.
However, many consider S&P’s move to be reflective of how it’s skewed in favor of tech stocks. The problem with indices, such as the S&P 500, is that they are constructed in a specific way.
Sector weightage plays a huge role in the overall results of the index. In its early days, the sector weights for energy companies were significantly higher than other companies. Today, the scenario has completely changed as IT companies make roughly 26% of the index, while energy comprises of only 3%.
This is why the S&P 500 index is not a reliable gauge to assess the strength of the economy. Tech stocks have done exceedingly well in the pandemic, while other industries have fallen off the proverbial cliff. It wouldn’t be wrong to suggest that the index is undiversified and goes against its original purpose.
The Way Forward
Shares of Exxon Mobil shed 38% of its value since the beginning of this crisis-stricken year. Moreover, it was removed from the Dow Jones Industrials after 92 years of being listed on the index.
On top of that, the weakened state of demand continues to widen losses for the company. All in all, things look rather terrible at this stage. Despite these challenges, I feel there are a lot of reasons why Exxon Mobil stock is worth investing in.
For example, its debt to equity ratio is 0.38, which is significantly lower than most of its peers. Companies such as Royal Dutch Shell (NYSE:RDS.A,RDS.B) and BP (NYSE:BP) have a debt to equity ratio of 0.66 and 1.1, respectively.
As we advance, it appears that the focus will be on cost control and maximizing productivity by focusing on advantaged projects. It aims to cut operating expenses by 15%, respectively. Additionally, its dividend payouts remain a significant priority, which it hopes to finance purely from its free cash flows.
Final Word on Exxon Mobil Stock
Exxon Mobil Stock is down 4% since its removal from the Dow Jones index, and it appears that investors have written it off. However, there’s a lot to look forward to with the company as it looks to re-invent itself.
It hopes to operate as a low-cost producer, which focuses on maximizing productivity with its existing assets. Its removal by S&P illustrates everything that is wrong with how indices work today.
Additionally, Exxon Mobil Stock is trading at a slight discount, so you should probably consider loading up on it.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.