Integrated energy giant ExxonMobil (XOM 4.00%) has one of the strongest records of dividend growth in the energy patch. But 2020 has been a challenging year for the company and its peers. In fact, things have changed drastically on the dividend front throughout the industry. But at the end of the day, Exxon's incredible dividend streak isn't over yet.
A terrible year
There's no question that 2020 has been among the most challenging years ever for some industries. That includes the energy sector, as global economic shutdowns led to a massive decline in demand for oil and natural gas. To make matters worse, all of the oil that didn't get used wound up in storage. That excess energy has to be worked off before oil prices can mount a sustained recovery.
Image source: Getty Images.
It got so bad that U.S. oil prices actually fell to zero at one point. To be fair, there were some technical reasons for this, and it was a temporary decline, but it speaks to just how badly misaligned supply and demand are right now. After recovering into the $40 range, Brent crude is once again dripping into the $30s as COVID-19 cases start to rise again.
Energy industry giants BP and Royal Dutch Shell have both slashed their dividends. They've also announced that they plan to shift toward cleaner energy sources. The goal is to ensure the long-term survival of their businesses. There's increasing concern that Exxon may have to follow suit on the dividend front.
The streak is not over
Exxon just announced its final dividend of 2020, keeping it flat with the previous quarter. That means that the quarterly dividend wasn't increased during the year. With that, you might think that 2020 marks the end of the company's 37-year streak of annual dividend increases.
But the streak is, technically, still alive. The reason boils down to timing. The last increase came in the second quarter of 2019. For that year the company's annual dividend per share came in at $3.43. Although the dividend wasn't increased in 2020, the first-quarter dividend in 2020 was still higher than the first-quarter dividend in 2019. So, in 2020, the full-year dividend will total $3.48 per share. So technically the dividend streak lives for another year.
|
Exxon Quarterly Dividends | |||
|---|---|---|---|
|
2020 |
2019 |
2018 | |
|
First Quarter |
$0.87 |
$0.82 |
$0.77 |
|
Second Quarter |
$0.87 |
$0.87 |
$0.82 |
|
Third Quarter |
$0.87 |
$0.87 |
$0.82 |
|
Fourth Quarter |
$0.87 |
$0.87 |
$0.82 |
|
Total: |
$3.48 |
$3.43 |
$3.23 |
Data source: ExxonMobil
The question is what happens from here. With regard to the dividend, Exxon has until the final quarter of 2021 to increase its disbursement if the company wants to keep the annual streak alive. Whether or not it can do that is the bigger question, given the low price of oil, the company's spending plans, and the fact that it has stated that it doesn't wish to increase its debt load any more than it already has. That stance was reiterated during Exxon's third-quarter-2020 earnings conference call.
XOM Financial Debt to Equity (Quarterly) data by YCharts
That's problematic for the dividend, because the company has been supporting the payout and capital spending by leveraging up its balance sheet. At this point, Exxon is trimming spending and looking to sell assets as it hopes to at least hold the line on the dividend. There's no crystal ball on Wall Street, but it is going to be challenging for Exxon to continue supporting the current dividend without an improvement in energy prices.
Time for caution
Exxon stated during the third-quarter conference call that it is developing its 2021 business plan with the goal of holding debt steady and maintaining its dividend. While that is reassuring, investors should go in here knowing that the sustainability of the dividend (with its massive 10%-plus yield) is an increasingly large risk. However, there's still a very long history here of supporting that payout through good times and bad. The annual streak is a visible example of that, and despite the fact that there was no hike in calendar year 2020, that streak is technically still alive. You probably need to take that positive bit of information with a grain of salt, but it is at least a slight silver lining on the very dark clouds still lurking on Exxon's horizon today.
