When a company as big and diverse as General Electric (GE -0.33%) says publicly that it's considering reducing its dividend, it should give investors pause. GE was viewed as a Dividend Aristocrat for decades before the financial crisis but was working hard to get that title back. If conditions at GE are so dire that it needs to cut its dividend, then there must be other companies feeling similar pressure.
The energy business isn't performing as well as GE hoped, and that should worry ExxonMobil Corporation (XOM -0.89%) investors as well. If you look at the company's performance over the past decade, it's becoming clear that its dividend could be in trouble, just like GE's.
ExxonMobil's business is deteriorating
The oil business has become surprisingly difficult over the past decade as shale oil has flooded the market and OPEC has kept pumping oil and prices have remained low. Oil at $100 per barrel can be extremely profitable, but at $50, it isn't clear that many companies will make a solid return on investment.
Below, I've put together a chart that shows ExxonMobil's deterioration over the past decade. Revenue and earnings are down, and return on assets has also plunged from the high teens to low single digits.
Long term, I don't see how this trend won't get worse. Electric vehicles are now a very viable option for millions of consumers, and automakers are ramping up their manufacturing capacity. Even if just 10% of people start driving EVs, it'll crush oil markets. Remember, oil markets were only oversupplied by about 1% to 2% in 2014 when oil prices crashed from over $100 per barrel to the $30s. Electrifying the transportation fleet could have a much bigger impact on oil prices than that.
A dividend in trouble
Not only is performance deteriorating and the future looking cloudy, but ExxonMobil is already stretching itself thin on its dividend. Over the past decade, the company has been increasing its dividend, surpassing a 100% payout ratio, and taking out billions of debt in the process.
To put this plainly, ExxonMobil isn't generating enough net income from its normal operations to pay its growing dividend and is taking out debt to pay the current 4% yield. That's not sustainable over the long term.
ExxonMobil is facing a lot of the same financial pressures as GE, and with EVs on the rise, its core oil business could be in serious trouble over the long run. With a payout ratio over 100% today, this is a dividend that I think should be cut sooner rather than later. Investors should beware buying this seemingly safe dividend stock.