ExxonMobil (XOM 0.39%) has treated its investors like royalty over the years. The energy company has grown its dividend at an average annual rate of 6.2% over the past 37 years, increasing it every single year during that timeframe. That puts it in the elite class of being a Dividend Aristocrat.
However, while Exxon has been an excellent dividend stock over the years, that doesn't necessarily mean it will be one in the future. To gauge its potential, we need to dig a bit deeper, looking at not only the sustainability of the current payout but also its growth prospects. Here's a look at whether Exxon can maintain its status as a top-tier dividend stock.
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On solid ground even in the volatile oil patch
Exxon's dividend currently clocks in at a 5.1% yield, which is well above the 2% average of stocks in the S&P 500. While higher yields can often imply higher risk, that's not the case with Exxon's payout. Through the third quarter, the oil giant had generated a hefty $23.4 billion in cash flow from operating activities, which was more than enough to cover the roughly $11 billion it paid out in dividends. While cash flow is down from $27.4 billion in the year-ago period because of all the volatility in the oil and gas market, the company still generated lots of excess cash after paying its dividend to invest in expansion projects.
Exxon, however, has invested $22.7 billion on expansions so far this year, outspending its cash flow by a wide margin. That's by design, though, as the company is in the middle of an ambitious long-term growth program. It's bridging the gap by selling assets and using its top-tier balance sheet. Overall, the company has sold $4.8 billion in assets this year, which is ahead of its pace to achieve its target of selling $15 billion of assets by 2021.
With a business that's generating a gusher of cash, a top-tier balance sheet, and an active asset sale program, Exxon's high-yielding dividend appears to be on sustainable footing.
Plenty of fuel to drive growth
Exxon's multiyear expansion program should increase its output by 1 million barrels of oil equivalent per day (BOE/D) by 2025. That implies a 25% increase from 2017's baseline level, which is a huge jump for such a large oil producer. The company believes that its investments to grow its upstream production, as well as its downstream refining and chemicals businesses, will fuel a 140% surge in its earnings and cash flow by 2025 from 2017's level. That assumes the global oil price benchmark, Brent, stays around that year's average of about $60 a barrel.
Exxon is investing in several major projects around the world, including in the Permian Basin and offshore Guyana. These projects boast ultra-low production costs, which will enable the company to generate healthy cash flow growth even if oil prices decline. In the Permian Basin, for example, it can earn a 10% return on its investments in new wells at an oil price of less than $35 per barrel. Meanwhile, offshore Guyana can produce that same return at around $40 a barrel. Because of those low costs, Exxon can grow its cash flow by 55% by 2025, even if oil averages $40 a barrel. Given that view, the company should have plenty of fuel to keep growing its dividend, especially since crude oil is currently above plan at $63 a barrel.
ExxonMobil appears poised for more dividend greatness
Exxon's base plan would see it grow its cash flow by 7% per year through 2025, assuming oil prices remain roughly flat at around $60 a barrel. Meanwhile, it can still grow its cash flow at a healthy rate even if crude slumps to $40 a barrel. Because of cash flow growth, and its healthy balance sheet, it seems likely that Exxon will be able to continue increasing its high-yield dividend. That makes it a great stock for income-seeking investors.
