I miss the days where when we actually received compensation for storing money in banks. Thanks to ultra-aggressive central bank policies, there’s hardly any fixed income available anywhere. The offers we receive these days tout 0.6% interest on deposits. That’s pathetic to what it used to be just a few years ago. This makes the argument for owning Exxon Mobil (NYSE:XOM) stock a slam dunk yes.
This is not the case where I am optimistic for upside potential from a rise in the price of oil. In fact, I’ve written against this notion of the commodity spike. The experts like Goldman Sachs have their reasons for believing it. I, on the other hand, revert to simple logic: We are flying, driving, and meeting face-to-face less often.
Furthermore and with the rise of the electric vehicle, the world has committed to ditching fossil fuels for propulsion motors. All major car manufacturers have officially changed future production plans away from gas to electric. Based on that logic alone, I have successfully shorted the spikes in Chevron (NYSE:CVX) and Exxon stocks this year.
But after dips into support, owning them makes more sense than not. Both companies have defended the dividend as being sacrosanct last year. They followed through, so I am comfortable knowing that this won’t change much. This is a Goldilocks scenario where the stock should hold its value. And if it doesn’t, the dividend reward is big enough to allow for some leeway.
XOM Stock Rewards Its Owners Handsomely
Exxon stock currently pays 6.3% in dividends to its equity holders. That’s 10 times more than the last offer I received in the mail this week. Moreover, the stock price has risen more than 30% just this year. Owning the stock has had its advantages for investors. This is not likely to change, especially that now it has given back 16% from its June highs. Technically, it should hold the support level at $52 per share. If it doesn’t, then could lose another 10% from there.
Even still, owning the shares at least for a starter position still makes sense. This could differ based on investor time frames. But for the mid- to long-term, the current macroeconomic conditions suggest tepid growth. As long as we don’t have a recession then the downside is relatively small. It is important to know that today I am not making the case for chasing upside capital appreciation.
The argument of owning XOM stock is the same as the old-school bond investors. Except in this case even the mighty U.S. 10-year bond pays less than 1.4%, so it pales in comparison to the reward from Exxon. Management has earned the benefit of the doubt. Even under duress last year, they publicly defended the dividend payout. They shared their strategy for cutting capital expenditures. But more importantly they assured investors that they had even more to cut if the need arises.
A Fixed-Income Alternative?
Therefore, investors should be comfortable owning XOM stock for fixed income. Even though global business is not yet back to normal, oil has recovered its entire pandemic dip and then some. While I don’t share the enthusiasm that the experts have for prices from here, this is an impressive accomplishment.
But it also leaves some room for disappointment from the commodity prices. And potentially could contribute to some downside in oil stocks.
In the end, XOM stock will follow the markets in general. In the absence of a Black Swan, I bet that stocks will have more upside this year than downside risk. Meanwhile, the two major oil companies are adapting to the new trends. Delta Airlines (NYSE:DAL) has pledged to replacing 10% of its fuel with renewable alternatives. Chevron is already working on becoming a supplier for that. Exxon is also hard at work on bringing cleaner energy to the world.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.