For years, ExxonMobil (XOM 0.77%) predecessor Esso urged customers to "put a tiger in your tank" in its advertising. How about putting a tiger in your portfolio this summer to boost your income and increase your long-term returns? Here's why North America's largest energy company by market cap looks like a buy.
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Over 100 years of dividends and counting
With a dividend yield of just over 4% and an unassailable track record, investors can feel good about ExxonMobil's dividend payout. Many companies that were previously thought of as dividend stalwarts, such as large-cap U.S. companies like General Motors and Walt Disney, as well as oil patch peers like Royal Dutch Shell, have suspended or cut their dividends in recent years. ExxonMobil stands out for paying its dividend for over a century straight. Furthermore, ExxonMobil has increased this dividend for 39 consecutive years, making it a Dividend Aristocrat.
Beyond the dividend, ExxonMobil also just showed record earnings and cash flow in its latest 8-K filing, and the company is smartly utilizing this uptick in oil prices to reduce debt and return capital to shareholders with share repurchases. I like this capital allocation approach, because paying down debt while the sun is shining will put ExxonMobil in a healthier position for a rainy day the next time there is a prolonged decline in oil prices. The $30 billion share repurchase plan is impressive because it triples the size of the authorization previously in place, and would allow the company to buy back almost 10% of its current market cap, increasing earnings per share in the process. Reducing the shares outstanding is also great for holders of a dividend payer like Exxon because it reduces the number of shares for the dividend payout to be divided between.
NYSE: XOM
Key Data Points
Go green -- and blue
While some investors eschew oil companies because they are either against fossil fuels or because they believe they will be phased out, the reality is that we are going to need oil for many decades to come. Furthermore, ExxonMobil's products are used for much more than just fuel -- the company has a large chemical business.
But even if an investor is still wary about oil demand several decades from now, ExxonMobil still has a lot to offer. The company is working to become a leader in climate change mitigation strategies like carbon capture and storage, and it has the know-how, resources, and talent to do so. For example, Exxon is working on developing blue hydrogen, a low-carbon hydrogen produced by carbon capture and storage that prevents carbon dioxide emissions from entering the atmosphere. Exxon believes that blue hydrogen may one day become a low-cost and low-carbon option for heating businesses and homes, as well as for fuel for heavy vehicles. Exxon is working to develop carbon capture storage technologies, in which one day carbon may be removed from the atmosphere and injected into rock formations. ExxonMobil predicts that this could become a $4 trillion industry by 2050. While this is far out into the future and should probably be taken with a grain of salt, fellow oil and gas producer Occidental Petroleum also views this as a $3 to $5 trillion market, which seems to corroborate ExxonMobil's forecast. ExxonMobil is also working on developing biofuels derived from plants and algae. Biofuels can be used with many existing engines, making them a potentially attractive low-carbon option in the future because engines won't need to be replaced to use them.
Is ExxonMobil a buy?
While ExxonMobil and its peers in the energy sector have posted record results and their shares have outperformed the rest of the market this year, a recent pullback has knocked shares 20% off of their 52-week high. The pullback has largely been caused by a drop in oil prices from above $125 to just below $100 over the course of the last month.Even with oil prices in the $90s, companies like ExxonMobil will be able to continue to produce strong earnings. Furthermore, while higher oil prices are clearly a net positive for ExxonMobil, it doesn't have as much downside from lower oil prices as some of the upstream oil companies because of its extensive refining and chemicals businesses.
This pullback creates an attractive entry point for prospective investors. Even after a 40% gain over the last year, shares of ExxonMobil are still attractively valued at 14 times earnings and just 8 times next year's projected earnings. Investors are getting an attractively valued industry leader with a sterling dividend history that is posting record results, deleveraging, and buying back shares hand-over-fist, all while keeping an eye on the future by working to develop alternative energy solutions. Putting a tiger in your portfolio this summer looks like a prudent long-term move.
