In the world of Big Oil, two companies reign supreme: ExxonMobil (XOM -0.09%) and Chevron (CVX 0.75%). ExxonMobil and Chevron are the two largest U.S.-based integrated oil companies, with market capitalizations of $357 billion and $201 billion, respectively.
For income investors, these two companies are especially beloved. They're both members of the exclusive Dividend Aristocrat list, meaning they have both raised their dividends for at least 25 years in a row. And, they offer two of the highest dividend yields in the Dow Jones Industrial Average.
As a result, ExxonMobil and Chevron are two top dividend stocks. But while ExxonMobil and Chevron might seem identical, their shareholder policies meaningfully differ, with respect to dividends versus share buybacks. As a result, in a head-to-head matchup of these two titans of Big Oil, read on to discover which one is the better dividend stock for income investors.
Dividend policy: Chevron
ExxonMobil prefers to utilize share buybacks to a greater extent than Chevron. In fact, Chevron recently announced it wouldn't buy back any stock in 2015. Previously, the company had been executing repurchases at a rate of about $1.25 billion per quarter, or $5 billion per year. By comparison, last year ExxonMobil distributed $23.6 billion to shareholders last year, comprised of $13.2 billion of share repurchases and the remaining $10.4 billion for dividends.
As a result, ExxonMobil accepts paying a lower dividend in exchange for reserving cash to buy back its own stock. This explains why Chevron offers a higher yield than ExxonMobil, 4% to 3.3%.
CVX Dividend Yield (TTM) data by YCharts
As you can see, Chevron has consistently been a higher yield than ExxonMobil over the past five years. While growth investors typically favor share buybacks, which reduce shares outstanding and boost EPS in a tax-advantaged way, income investors like to see fatter dividend payments each quarter. As a result, Chevron gets the nod for its stronger dividend policy.
Dividend growth: ExxonMobil
While ExxonMobil offers less current income than Chevron, it makes up for this with stronger dividend growth. This may not help investors who want income right now, but those with a medium-term or long-term horizon may generate more future income with ExxonMobil, as a result of its higher dividend growth rate. For example, ExxonMobil has increased its dividend by 10% per year, compared to 9% per year for Chevron. This might not seem like a big difference, but put differently, ExxonMobil's dividend is set to double every seven years, while it would take Chevron eight years to double its dividend, at their respective growth rates.
In addition, each company is due to increase its dividend next month, and it's likely ExxonMobil will grant a higher raise. That's because ExxonMobil consistently maintains a lower payout ratio than Chevron.
CVX Payout Ratio (TTM) data by YCharts
ExxonMobil earned $7.60 per share last year. Its $2.70 per share dividend represents 36% of earnings. Meanwhile, Chevron pays a $4.28 per share dividend and earned $10.14 per share, leading to a 42% payout ratio.
Because of this, ExxonMobil can more easily afford a more generous dividend increase than Chevron once again this year.
Which is the better buy? It depends
Chevron pays a higher current dividend yield, meaning you'll get more income now. On the other hand, ExxonMobil offers a lower yield, but makes up for it with higher dividend growth, and more money allocated to share repurchases. As a result, which stock is better for you depends on what type of investor you are.
Dividend growth investors should prefer ExxonMobil, while those investors who need more income right now should pick Chevron.
