Exxon Mobil (NYSE:XOM) has made it more than clear it will do it what it takes to maintain its beefy dividend. That makes XOM stock a great bargain even after rising over 20% in the past month to $41.68 at the Dec. 7 market close.
Moreover, the stock has a very attractive dividend yield at 8.35%, given its 87 cents quarterly dividend payment. This works out to an annual rate of $3.48 per share.
However, Exxon may not be able to cover this dividend for several years. For example, analysts still forecast just $1.44 in earnings per share (EPS) for 2021. That is less than half of the dividend payout.
Committed to XOM Stock Dividend
Yet, management has made it very clear what it intends to do.
Here is what Exxon SVP and Principal Financial Officer Andrew Swiger said on its recent conference call:
“… but our long term allocation priorities remain unchanged; investing at (sic) advantaged projects, maintaining a strong balance sheet and paying a reliable and growing dividend.”
In fact, during the call, various execs talk about paying a “reliable” dividend three different times. The company’s dividend was mentioned 33 times during the call. Here is another statement Swiger made:
“We are looking to increase divestments and working to maintain the dividend, while holding gross debt at second quarter levels.”
At another point, in direct response to a question about whether the dividend would be maintained if the price of oil stayed in the low 40’s, he said:
“From an overall messaging point, our objective is to maintain the dividend, advance the highest value investments, and maintain the debt at a cost competitive limit.”
Moreover, news reports came out this past week that management will cut up to 15% of its workforce by the end of 2021. This is the company’s attempt to make sure it can get profitable fast enough to be able to cover the dividend.
What Analysts Are Saying Now
As a result, analysts are starting to change their minds about XOM stock and its prospects. Moreover, analysts are now taking the company’s asset writedowns in stride.
There is a general perception that the incoming Biden Administration will promote policies that could inflate oil prices. Its general anti-carbon footprint approach to oil will make it more difficult to produce oil in the U.S. Tighter supply will make for higher prices, all things being equal.
In addition, price targets are starting to rise. Analysts surveyed by TipRanks.com have an average price target of $44.44, or more than 6% above today’s price. The average price target has consistently increased over the past month when there was just one “buy” report on XOM stock. Now there are three analysts on the Street telling clients accumulate the shares.
What XOM Stock is Worth
The easiest way to value XOM stock for the next several years is to compare its present dividend yield to its historical yield. For example, its average dividend yield over the past four years has been 5.12%.
Therefore, if we assume that XOM will “revert to the mean,” it will have to rise to reach the average dividend yield of the past. This assumes that XOM stock will have a stable dividend that will be cut. But I think I have established that so far.
To derive how high XOM stock can rise — i.e., what its value is — we divide the dividend per share by the average yield. For example, dividing $3.48 dividend per share by 5.12% produces a price of $67.97.
That target price is 63.1% higher than the present XOM stock price. Let’s assume that it takes two years for the stock to reach that price. That implies an average annual return of 27.7%. Combined with an average estimated 7.5% dividend yield, the total return will be 35% annually over the next two years.
Making 35% annually for the next two years each year is a great ROI for most investors.
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.
Mark Hake runs the Total Yield Value Guide which you can review here.
