I have to hand it to the management of fossil-fuel giant Exxon Mobil (NYSE:XOM). Despite all of the issues plaguing the energy sector, Exxon Mobil’s executives seem committed to maintaining the high dividend yield of XOM stock.
Is this commendable or just stubborn? That’s a legitimate question as the onset of the novel coronavirus has put heavy downward pressure on the demand for petroleum products.
As we’ll see, one analyst actually calculated how much financing Exxon Mobil might need in order to maintain the lofty dividend yield of XOM stock. It’s a large dollar amount, and it doesn’t bode well for the company and its stakeholders.
The bulls might counter that XOM stock is far below its 52-week high price, and as Warren Buffett likes to say, investors are supposed to buy stocks when there’s blood on the streets. In the case of Exxon Mobil, however, the bleeding might not cease for a while.
A Closer Look at XOM Stock
As I alluded to earlier, Exxon has a long way to go before it can reach its 52-week high of $71.37. I should also mention, however, that the bulls did get a quick shot in the arm recently.
At around the same time, Moderna (NASDAQ:MRNA) declared that its vaccine is 94.5% effective in preventing Covid-19. These events helped to bolster the stock market generally and the price of XOM stock in particular.
Thus, Exxon’s share price has climbed from around $33 on Nov. 2 to nearly $42 as of yesterday’s close. That’s not a massive run-up. Still, at this point, the bulls should appreciate any gifts given to them by the market.
One of the chief selling points for XOM stock is its dividend yield. Its distributions have been generous and consistent over the years. As a result, retirees sometimes use the stock as a replacement for government bonds, which don’t yield much nowadays.
I just did a quick check and currently, the forward annual dividend yield for XOM stock is 8.3%. That’s quite good, but informed investors should consider whether such a high yield is sustainable.
For his part, Exxon Mobil Senior Vice President and Principal Financial Officer Andrew Swiger seems abundantly confident in his company’s willingness and ability to maintain its dividend yield. While asserting that Exxon Mobil is “working to maintain the dividend,” Swiger appeared to suggest that the energy giant could somehow have its cake and eat it too:
“… our long-term capital allocation priorities remain unchanged; investing at advantaged projects, maintaining a strong balance sheet and paying a reliable and growing dividend.”
That’s a bold statement, if you really stop to think about it. Paying out a large dividend quarter after quarter is a costly proposition. And so is “investing at advantaged projects.” Personally, I would expect Exxon Mobil to realistically achieve one objective or the other, but not both.
I understand that it’s part of Swiger’s job to be a pitch man. He’s doing a commendable job, I’m sure, but Exxon Mobil shouldn’t commit to maintaining its dividend at all costs.
Bear in mind, this is a company that posted a staggering $680 million loss for the third quarter. And if one analyst’s calculations are correct, Exxon Mobil may have to dig out of a deep fiscal hole to fulfill Swiger’s vision.
MKM Partners Managing Director John Gerdes concluded that Exxon Mobil could need $8 billion of debt financing in order to maintain its dividend at the current level next year.
Startlingly, Exxon Mobil had $68.8 billion of debt as of Sept. 30. That’s a sharp increase from the $47.1 billion it owed a year earlier. All things considered, I expect that it will take more than positive vaccine-related news to fix Exxon Mobil’s long-standing fiscal issues.
The Bottom Line on XOM Stock
As you probably can tell by now, I don’t recommend chasing after Exxon’s vaccine-news bump. Furthermore, I’m not expecting Exxon Mobil to maintain its current dividend yield.
Swiger’s confidence has value in the short term, but it won’t solve Exxon Mobil’s deeper fiscal issues. Until those problems are properly addressed, it’s best to avoid a long position in XOM stock.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.