Exxon Mobil Corp (NYSE:XOM) is due to declare its next quarterly dividend on Oct. 29. This will affect XOM stock a great deal. To put it bluntly, the market does not believe that the rate will stay at 87 cents quarterly or $3.48 annually.
The dividend yield is now 10.55% (i.e., $3.84 divided by $32.98, as of Oct. 2). This is all due to the fall of XOM stock of $10, or 15.85% in the past month.
This signifies that most people believe that Exxon will cut the dividend by at least 50%.
To Cut or Not to Cut
As I pointed out in my last article, management has forcefully denied any plans to cut the dividend. They believe that their cost-cutting and capex spending cuts, along with borrowing, will give them enough liquidity to maintain the dividend.
The market is almost always right when it comes to dividend cuts. Clearly, analysts are predicting that is what will happen this time.
However, Barron’s reported this week that Exxon may indicate it may have to cut expenses further to maintain the dividend. The reason is that management apparently said during the last conference call that it would not increase debt further.
Another solid point in management’s favor is that even when XOM stock hit a low of $31.45 on March 23, the dividend stayed the same.
Moreover, Senior Vice President Neil Chapman said on a conference call about the dividend: “A large portion of our shareholder base has come to view that dividend as a source of stability in their income, and we take that very seriously.”
So now their statements are going to be put to the test. On Oct. 29, the company will either maintain the dividend or not. I suspect that management will be forced to cut expenses further and keep the dividend steady.
Otherwise, who would believe any of their statements in the future? They could try and finesse an excuse or “spin” their way out of keeping the dividend steady, but investors will see through this.
How Exxon Will Pay the Dividend
Here are the cold hard facts. The 87 cents per share dividend costs about $3.715 billion each quarter, or $14.86 billion a year.
The problem is in Q2 Exxon made negative $4.4 billion in free cash flow, even before paying this dividend. And even in Q1, it only made about $329 million in FCF. So this whole year, it could not afford the dividend.
The company took on $11.2 billion in net debt in Q1 and $9.8 billion in Q2 to finance its FCF losses and the dividend requirements. That was a total of $20 billion or so in added debt.
This was used to pay the FCF losses and dividends. The total FCF losses and dividends in the first half added up to $11.5 billion. So, after the $20 billion in additional debt, it had an extra $8.5 billion.
Actually, after other smaller items, Exxon added $9.5 billion to its cash balance sheet. But, as you can see, this was mostly from borrowing more money. However, its cash and investments balance on June 30 stood at $12.6 billion.
But remember, the Q2 FCF losses and dividends cost $4.417 billion, plus $3.715 billion, or $8.132 billion. Unless Q3 FCF turns positive or its capex is cut, almost 65% of its cash will be used up in Q3.
But the company could also sell assets to fund the dividend. So, without raising more debt, Exxon needs to sell assets, cut expenses to reduce negative FCF, and reduce its capex spending.
This helps you understand how tight Exxon’s finances are in relation to the dividend and XOM stock.
What to Do With XOM Stock
Remember, even if Exxon can get FCF losses to zero, or raise money from asset sales, it still has to cough up $3.72 billion for the dividend. That alone uses up 29.5% of its cash and investments balance.
Of course, all bets are off if the price of oil and gas rises. Then the company will start to make positive FCF. At that point, the stock will rise dramatically.
Analysts are now very gloomy about the price of oil. They see the pandemic spreading through the coming winter, forcing economic activity lower.
However, according to Seeking Alpha, the prospects for next year are much more sanguine. “Standard Chartered analysts now expect global demand to fall by 9M bbl/day this year before recovering by ~5.5M bbl/day next year, leaving the 2021 average slightly below the 2016 average.”
So, assuming the company keeps its dividend steady and assuming oil keeps falling, it is possible the yield could go over 13%.
I suspect that this is possible if XOM fell another 20% over the next quarter. At that point, the price would be $26.38, but the maintained dividend would be $3.84. The yield would be 13.2%.
Patient investors will either wait until Oct. 29 or if the stock hits a 13% yield to buy more shares.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.