Friday, June 19, 2015

ExxonMobil (XOM) Dividend Stock Analysis

Dividend Growth Stock Blog
This is Div4Son,



When I ran my simple screen at the beginning of this month, several well known companies appeared on the list. On company was ExxonMobil and I was particularly interested in the Yield/Avg Yield criteria (~around 36% above the average yield which represents good value). Moreover, I wanted to average down  on my positions with XOM.

This article is a summary of my dividend stock analysis of ExxonMobil (XOM) based on my notes.

ExxonMobil (XOM) Dividend Stock Analysis

About XOM

ExxonMobil is an American multinational oil and gas corporation is the world's 5th largest company by revenue, second largest publicly traded company by market capitalization.

With 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels, ExxonMobil is the largest refiner in the world and the largest of the world's supermajors with daily production of around 4 million BOE.

Competitors are RDS.B, CVX, EC, PBR, OGZPY.

Criteria

XOM 6/2015
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
33 Years
ROE/EPS/Op Margin
Stable
Yes
See Chart
Long term Avg Growth
Stable
10 yr avg - Yes
3 yr avg - No
See Chart
FCF over Dividends
Yes
Yes
See Chart
M* Moat
Wide Moat
Yes
M* Wide
M* & S&P
Credit Rating
> BBB+
Yes
M* AAA
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes
Cash to Debt 0.16
Interest Coverage 180.52
Debt to Equity 18
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 3 Stars A Quality
Payout Ratio
<60%
Yes
41.00%
Dividend Growth
& Yield
Dividend Yield
>3%
Yes
3.40%
Dividend Growth
>5%
Yes
10.90%
Chowder
>12%
Yes
14.30%
Valuation
Yield/Avg Yield
>1.1
Yes
1.36
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 117.99
Low Point 83
DRRM
~10%
Yes
Assuming 6% growth; projected return=10.8%
M* Estimate
<M* est
Yes
M* 98
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 95

Note: data from M*, Yahoo, Gurufocus and CCC

Quality analysis

Years of Dividend raises

XOM has 33 years of dividend raises. XOM dividend has been pretty stable.

Stability of key metrics

These ratios provide an indication of how wide the moat is. I am looking for overall stability (or even better - growth). If the ratios decline year over year, then this is an indication of moat reduction. I also compare these ratios with other companies within the same sectors. The operating margin and ROE are in the top 75% of Global Oil & Gas Integrated industry.
Exxon’s ROE and Operating Margins are fairly stable. This is a good indication of strong moat.

Free cash flow over dividends  

I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends.
With the exception of 2010, the FCF easily covered the dividends. This gives a good indication of continued dividend growth.

Average growth

Here, I look for the stability of growth indicators over ten years using the EPS and Revenue.



The 2010 EPS & revenue numbers took a dip in 2010. Otherwise, there is an overall growth during the 10 years.

The 10 year averages show reasonable growth with ~9% revenue growth and ~14% EPS growth. However, the 3 year averages paint a different picture.

S&P CapIQ estimates forward 3 Year CAGR EPS to be -3%.

Therefore, there is stagnation in the growth metrics in the near term.

M* Moat

I simply use the moat indicator from M* to validate my findings.  M* indicates that ExxonMobil has a wide moat. ExxonMobil has a wide moat because they deal and lead in upstream and downstream businesses  along the oil and gas value chain.

Credit rating

Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective.

Exxon’s credit rating from M* is AAA which is a good indication of the security of the company.

Debt

I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5). Sometimes, a little good debt is good for a business. But too much debt can be a burden.

Exxon’s Cash to Debt 0.16 with Interest Coverage at around 180 which means the debt can be easily covered. The TTM Debt to Equity is around 18.47  which is well below the 50% threshold.

Over the years, the debt to equity ratio is well controlled (around 10% for the last 10 years).
M* and S&P capital IQ rating

I am looking for 3 stars and above from either. A four/five star is a bonus.  
M* gives ExxonMobil 4 Stars and S&P CapIQ gives 3 Stars with A quality company

ExxonMobil combined stars is 7 - which means it is a good indication to buy.

Dividend Yield and growth

  • Dividend yield is 3.4% which is above my threshold of 3%.
  • 5Y CAGR dividend growth is 10.90  which is higher my threshold of 5%.
  • Chowder is around 14.30 which is above my 12% threshold.
The median YoY dividend growth is around 10% for the last 10 years.

Payout Ratio

The payout ratio for ExxonMobil for the recent quarter is around 41% which is below the threshold of 60%.  For the last ten years, ExxonMobil has managed to keep the payout ratio lower than ~40%.

Value analysis

Average yield

The current yield per average yield for 5 years ratio is 1.36. I use this as a quick indicator for valuation.This basically means that Exxon's current yield is 36% over the average yield - which represents good value.


Dividend yield theory Mid Point

Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.  



I estimate the high and low yields to be:

Ticker
XOM
High
3.50%
Low
1.90%


This gives the following high, mid and low price ranges.

High Price:
152.95
Mid Price:
117.99
Low Price:
83.03

Exxon’s current price is in the mid 80s which means it is near the low price line.

Dividend Drill Return Model

Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative growth rate of 6%.


DDRM

Dividend Rate ($)
2.91
Divided by: share price
85.47
Current yield (%)
3.40
Core Growth Estimate (%)
6.00
Divided by: ROE (%)
16.04
Multiplied by: EPS ($)
6.67
Cost of Growth (%)
2.50
Earnings per Share ($)
6.67
Minus: Dividend
2.91
Minus: Cost of Growth
2.50
Funding Gap ($)
1.27
Divided by: Share Price ($)
85.47
Share Change (%)
1.48
Core Growth (%)
6.00
Plus: Share Change (%)
1.48
Total Dividend Growth (%)
7.48
Plus: Dividend Yield (%)
3.40
Projected Total Return (%)
10.88

My threshold for total return is 10%. Exxon’s projected total return is 10.88%.

Rearranging the numbers based on the dividend growth & 6% growth:

Dividend Rate ($)
2.91
Required Return (%)
10.00
Growth (%)
7.48
Price
115.53


Dividend Rate ($)
2.91
Required Return (%)
10.00
Growth (%)
6.00
Price
72.65

The average of the two is around the mid 90s -- but I prefer the 70s estimate which is close to the low price point.

M* and S&P valuations

Morningstar gives ExxonMobil a target of $98. S&P capIQ gives a target of $95. Therefore, with a current price around mid 80s, ExxonMobil is fairly priced.

Risks

  • Low oil prices will affect ExxonMobil to increase debt and potentially reduce dividend growth.
  • ExxonMobil global presence brings problems from foreign politics and exchange rate risk.
  • ExxonMobil faces environmental legislation from increasing environmental concern over environmental degradation and global climate change.

Conclusion

ExxonMobil is tied to energy and oil prices which are decreasing dramatically. This makes
capital intensive projects to be no longer economical. In conjunction with deterioration of
refining fundamentals in the U.S. and Europe, profitability will be stagnant for a while. This is reflected in the short term growth numbers.

However, the balance sheet is very healthy - in regards to cash and debt. Therefore, the dividend should be relatively safe for many years.

Therefore, I believe Exxon is still one of the companies to hold for decades. I will continue to invest regularly - especially when the market is killing the energy industry.

From a price perspective, I believe the current price (in the mid 80s) is very reasonable. If it drops further, I will be averaging down more since I am still accumulating in small increments. This is quite possible since the current P/E (TTM) is around 12 but the forward P/E is around 15.

I recently bought 19 shares of XOM at around $84. Now, I have around 57 shares of XOM with a forward estimated dividends of around $120.

That's it for all. What do you think of ExxonMobil?
D4S

7 comments:

  1. As always, great work Div4Son. XOM is a great company with a proven history. It is a company that we already own in our family's dividend stocks portfolio, but definitely a holding we wouldn't mind adding to. Especially, at current prices in the mid-80s. In fact, we have it on our short list and will likely include it in our next Ask The Readers post.

    BTW, we just added your post to our Collection of Stock Analyses. Hope it drives some addt' traffic your way! :)

    Regards, AFFJ

    ReplyDelete
    Replies
    1. AFFJ, Thanks for all the support and referrals from your site! I look forward to your "Ask The Readers post".
      Also, I really appreciate you keeping a list of Stock Analyses from everyone. It's a great resource!
      D4S

      Delete
  2. Nice analysis DS.

    I dont own any XOM currently but its my top choice in the energy sector. I dont worry about them in the short term but long term i am concerned about the worlds oil use in general. Time will tell i suppose.

    ReplyDelete
    Replies
    1. Adam,
      Thanks for your comments.I think the energy sector will be okay in the next couple of decades, but that's my opinion. Longer than that, we probably have other technological areas to invest in.
      D4S

      Delete
  3. Div Son,

    I hope you know I'll be coming to you once I really start to get my feet with with DGI. Remember, you brought this on yourself! :)

    Also wanted to ask, did you update your theme or is it just me?

    FM

    ReplyDelete
    Replies
    1. FM,

      Sure, no problem. In many ways, I am just getting my feet wet also.
      And yes, for the theme, I recently increased the width of the template (for the plots to fit in).

      D4S

      Delete
  4. Ah, that explains it. I knew something had changed.

    ReplyDelete