International oil major Eni SpA (NYSE:E) has a huge 8.4% dividend yield, more than double ExxonMobil Corporation's (NYSE:XOM) 3.7% yield. But that fat yield doesn't make Eni the better dividend stock. To be fair, there are reasons to like Eni beyond the dividend yield, including the huge opportunities presented by its Zohr project in Egypt and its Mozambique natural gas fields. But despite some positives, here are three reasons why ExxonMobil is a better choice for dividend investors than higher yielding Eni.
1. Debt decisions
At the end of the first quarter long-term debt made up 28% of Eni's capital structure. That's not an unreasonable level of debt by any means. However, Eni's core business is selling a commodity subject to often large and sudden price swings. Which is exactly what happened in mid-2014 when oil fell from over $100 a barrel to the $30 a barrel area at the worst of the decline. Oil prices have moved higher since that point, hovering in the $40 to $50 per barrel range lately, but it's still well off its highs.
Exxon's long-term debt makes up just 12% of its capital structure. That gives the oil giant a material amount of flexibility that Eni just doesn't have. In fact, Exxon has made extensive use of its balance sheet strength during the downturn to support its business and dividend. At the start of 2014, long-term debt was roughly 5% of the capital structure. Eni's long-term debt, for comparison, was around 26% of its capital structure at the start of 2014...
Clearly Eni didn't have the same capacity to support its business with debt, and still doesn't. Which helps explain why Eni sold a stake in its Mozambique gas field to Exxon. And why it partnered up with BP on the Zohr project. Basically, you can get a piece of Eni's high profile projects without buying Eni and it's heavy debt load. In my opinion, Exxon's solid balance sheet is the better option.
2. Not exactly integrated
The next reason to prefer Exxon over Eni is the basic business of each company. Exxon is a truly integrated oil major, with oil and natural gas drilling balanced against its chemicals and refining assets. To highlight the benefit of this, Exxon's earnings after income taxes fell by roughly 50% in 2015, a really bad year for all oil companies. But earnings at its chemicals business were up slightly year over year and its downstream earnings more than doubled, as refining benefited from falling oil prices. That helped offset the massive 75% drop in earnings from its upstream oil and gas drilling business. In fact, the downstream business earned almost as much on an absolute basis as the upstream business that year. This balanced approach allowed Exxon to report a profit for the full year.
Now compare that to Eni, which has a diversified business but is more heavily weighted toward exploration and production. Adjusted net profit in 2015 fell a massive 90%, with asset write downs pushing the company's earnings deep into the red. It simply didn't have the balance to offset the decline on the oil and natural gas side of the business. To give you an idea of the scale of the problem, in 2015 adjusted earnings in the downstream business totaled 387 million euro compared to the 4.1 billion euro provided by the upstream segment. In other words, when Eni needed diversification its downstream business was little more than a rounding error. I'll take Exxon's truly diversified business, thanks.
3. At the first sign of trouble
If Eni's big yield attracted you to the name, then step back and take a look at the company's dividend history. Between 2014 and 2015 it cut the dividend roughly 30%. Essentially, at the first sign of trouble shareholders took a dividend haircut. When you look at Eni's leverage relative to Exxon and the relative lack of diversification in its business you can see why that decision was made. And it was probably the right move for the company. However, if you were relying on those dividend checks, the cut would have hurt. At this point you shouldn't look at Eni's dividend as secure in any environment. (Note that currency fluctuations have recently pushed Eni's dividend even lower in dollar terms, in euros it has remained at the same level since the cut.)
ExxonMobil, on the other hand, used its balance sheet strength and truly diversified business model to keep rewarding investors with annual dividend increases each year through the downturn. The company's annual streak is now up to 35 consecutive years, making Exxon a dividend aristocrat. Recent hikes have been more modest than historical increases, but that's to be expected in a difficult industry environment. The real point is that Exxon wins hands down compared to Eni when it comes to returning value to shareholders via a consistently growing dividend.
Too many worries
Eni offers investors a massive yield right now. But once you look past that, the positives at the oil giant just don't offset the negatives. Eni has less financial flexibility than Exxon, a less than inspiring dividend track record on an absolute and relative basis, and it lacks the diversification that Exxon's business offers -- a difference that showed up notably in 2015 when Eni chose to trim its dividend. Exxon has proven its dividend commitment for 35 consecutive years and despite the relatively low yield, I'd rather own Exxon than Eni any day.