The gap between energy stocks and the rest of the market continues to widen. And nowhere is that more apparent than on the Exxon Mobil (NYSE:XOM) stock chart.
Despite the S&P 500 blasting off to new heights, XOM has proven altogether unable to get off the mat. Tuesday’s drop pulled it to a new four-month low, returning its year-to-date loss to -43%.
Meanwhile, the Nasdaq is up by roughly a gazillion percent. Absolute weakness, relative weakness — you name it, Exxon suffers from them all.
But what about that juicy 8.8% dividend yield? If there’s anything that makes owning such a terrible underperformer palatable, it’s that. Sure, Exxon Mobil is a dog, but at least I’m getting paid nearly 10% to wait for its eventual resurrection! Or so the justification goes.
I don’t fault anyone for being tempted by the massive payout, but I’d caution you against looking at the dividend in isolation. You mustn’t lose sight of the total return, which accounts for both dividends and price movement. If the stock is sinking faster than quarterly payments are coming, then you’re still losing money no matter how large the cash flow.
There are two big things Exxon Mobil stock needs to make it a dividend play worth pursuing.
Two Signs of an Exxon Mobil Stock Turnaround
For starters, it needs to stop sinking like a stone. While an uptrend would be nice, I’d be willing to settle for some sideways consolidation — in other words, stability. If price can establish itself above the 50-day moving average, like back in May, then it would go a long way in improving the appeal.
To be fair, XOM did carve out a nice little range throughout the summer, but that all ended last week when the stock finally cracked support near $41. That officially concluded the consolidation and kicked off a new downtrend. Every moving average is now falling as well, confirming bears control the trend across all time frames.
There are a few minor floors that could halt the descent, but falling back toward the low $30s is a genuine possibility. And that’s an outcome that would erase the next three years of dividends in short order. The only argument that buyers can make here is that Exxon shares have fallen low, but that assumes you’re buying the bottom, and the ship stops sinking. Absent real evidence that the downtrend is reversing, this is a risky purchase.
The second thing Exxon Mobil needs is to start making money again. We have two consecutive losing quarters on the books, and that’s a streak the company needs to end pronto. You don’t have to be a mathematician to realize Exxon can’t keep sending 87 cents per share out the door every quarter when no money is coming in. Eventually, their dwindling cash pile demands a dividend cut.
Some might wait for both the trend to turn up and earnings to turn positive, but it’s the former that will likely happen first. Price almost always leads profits. If you want the quicker signal, then set an alert at the 50-day moving average. Currently, it’s hovering near $43. If XOM can climb back above it, that will be the signal that the market is starting to bake in a better future for the oil giant.
Bottom Line
Until then, chasing the dividend remains a high-risk endeavor. If you can’t help but buy, then do yourself a favor and scale-in. That is, buy some now, but leave some cash in reserve to buy more later at lower prices so you can improve your average cost.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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