ExxonMobil: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how ExxonMobil (NYSE: XOM  ) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether ExxonMobil is a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

ExxonMobil yields 2.6%, a fair bit higher than the S&P 500's 2%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.

ExxonMobil's payout ratio is a modest 21%. Of course, the E&P has to make considerable capital expenditures to find and develop new oil fields, so it often generates considerably less free cash flow than net income. On a free cash flow basis, the payout ratio rises to a moderate 41%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

ExxonMobil carries an insignificant debt burden.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

ExxonMobil's earnings plunged dramatically along with energy prices during the global economic downturn in 2009, but they've since recovered. All told, earnings per share have grown at an average annual rate of 6% over the past five years, while dividends have grown at a 9% rate. For what it's worth, analysts do expect earnings growth to continue growing in the low single digits over the coming years.

The Foolish bottom line
So, is ExxonMobil a dividend dynamo? Perhaps. The company has a solid yield, a moderate payout ratio, and manageable debt. Of course, dividend investors will want to keep an eye on whether ExxonMobil is able to continue growing its earnings at a reasonable pace given the increasing costs and difficulty of tapping newer wells.

If you're looking for some other great dividend stocks, check out "Secure Your Future With 9 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these nine generous dividend payers.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter, @TMFDada. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1998031, ~/Articles/ArticleHandler.aspx, 10/21/2014 1:29:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement