Three Reasons Why Exxon Stock Will Rise Even if the Price of Oil Falls

XOM stock - Three Reasons Why Exxon Stock Will Rise Even if the Price of Oil Falls

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  • Exxon Mobil Corp (NYSE:XOM) has done very well so far this year, as it’s already up over 33% YTD.
  • As one of the largest oil companies in the world with a $344 billion market capitalization and growing amounts of free cash flow (FCF).
  • This will fund its dividend and the new buyback program, pushing XOM stock even higher.

Exxon Mobil ended last year at $61.19 per share but as of March 22, it was already up to $81.29. That implies that XOM stock is already up 33% year-to-date (YTD), a stellar performance. However, even if the price of oil falls from here, as long as it is not too drastic, Exxon stock could still move higher.

The reason has to do with its attractive valuation parameters, as well as its shareholder returns. This article will delve into three reasons why XOM stock can still rise even if oil falls.

XOM Exxon Mobil Corp $81.29

Exxon’s Standout Value Characteristics

On Feb. 1 Exxon released absolute stellar results for fourth quarter and all of 2021. For example, the company said it produced $48 billion of cash flow from operating activities in 2021. This was the highest level since 2012. It said that this amount more than covered its capital investments, paydown of its debt, as well as its dividend payments.

The dividend is a very proud point for the company. During the whole Covid-19 pandemic, it was one of the few companies that did not stop paying its dividend.

In fact, at one point in 2020 Exxon’s dividend yield was well over 10% as the market anticipated that management would cut it. I wrote about this on Nov. 3, 2020, in my article, “Exxon’s Dividend Commitment Is a Strong Sign for Shareholders.”

So, if it did not cut the dividend then, shareholders can equally be confident that management is also committed to growing it now. For example, the dividend cost just $3.763 billion during Q4 based on page 11 of its earnings release. But its operating cash flow (after working capital changes and asset sales) was much higher at $17.795 billion (page 7).

In other words, you can see that there is a huge amount of free cash flow (FCF) after deducting the $3.763 billion dividends from the $17.8 billion (i.e., $14.0 billion). This FCF can be used to hike the dividend going forward, as well as pay down debt and conduct its new share buyback program.

In fact, two quarters ago Exxon slightly raised its quarterly dividend from 87 cents to 88 cents. I expect that given its higher cash flow now, the next dividend raise could be much higher. Expect that to happen around the end of October 2022.

The New Buyback Program

At its recent Investor Day on March 2, Exxon detailed plans on how it would save $9 billion in costs by the end of 2023. That will add to its cash flow and its ability to implement its new buyback plan.

It said that these structural reductions would allow the company to accomplish the following:

…enable ExxonMobil to double earnings and cash flow potential by 2027 versus 2019, reduce breakeven costs by roughly $10 per barrel, boost returns on capital employed, and sustainably grow total shareholder returns and distributions.

Exxon had previously announced on Feb. 21 that it had begun a $10 billion share buyback program. Exxon had stopped doing that in a major way after 2015, although it generally bought back less than $1 billion annually since then. For example, in 2015, Exxon spent over $4 billion in 2015 and in 2012, it repurchased over $21 billion of its stock.

It’s not clear how much Exxon will spend on buybacks this year. When Exxon releases its Q1 financials we will see how much it has spent and then we can judge its pace.

How This Helps XOM Stock

The buybacks will help push up the price of XOM stock. It also reduces the share count, allowing the dividend per share to rise for the same dividend cost.

So for these three reasons we can expect that the stock could still rise, even if oil falls from here. Its cash flow gains from expense reductions, its steady dividend, and its ongoing share buyback program will all support XOM stock.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/xom-stock-will-rise-based-on-cost-reductions-dividend-growth-and-buybacks-even-if-oil-falters/.

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