What if you could sit back and earn money when you sleep? It's possible through passive income. One of the easiest ways to earn passive income is by investing in dividend stocks, or stocks in companies that make regular cash payments to their shareholders. One company with a history of regularly paying and increasing its dividend is ExxonMobil (XOM 6.13%).
ExxonMobil recently announced it would raise its dividend payout for the 40th consecutive year. This history of growing dividends puts the company in an exclusive group of stocks known as Dividend Aristocrats, or companies that have raised their dividends for 25 years or more.
ExxonMobil has enjoyed record profits recently and sits on a giant pile of cash. It has returned a big chunk of it to shareholders and plans to invest in the green energy transition to reduce carbon emissions. Here's why it could be an excellent addition to your portfolio.
NYSE: XOM
Key Data Points
Oil producers have benefited from higher prices this year
ExxonMobil explores, produces, and moves crude oil, natural gas, petroleum products, and other petrochemicals in the U.S. and globally. The company has a long history operating in the oil and gas industry and is one of the biggest players in the game. Its long history of growing its dividend is a testament to the strength of the business and strong capital management over the years.
In the last year, rising crude oil prices have resulted in surging profits for companies across the industry. The company has enjoyed tailwinds from rising Brent Crude Oil prices, which are trading at their highest prices since 2014. Through the first nine months of 2022, ExxonMobil's revenue grew 59% to $318 billion, while its net income has grown an astounding 202% from the year before.
The company's stellar performance continued in the third quarter, when it produced 3.7 million barrels per day, up 50,000 from the prior quarter (excluding divestments and its exit from Russia). While crude oil fell during the quarter, its natural gas business picked up the slack and helped it put up a record quarterly profit of $19.7 billion.
ExxonMobil is swimming in cash
High oil and gas prices have resulted in companies in the industry making money hand over fist, which is why this is one area of the market that has outperformed this year while others struggle. In the third quarter, ExxonMobil generated $22 billion in free cash flow -- money that the company can reinvest in the business, use to pay down debt, and return to shareholders through dividends and share repurchases.
ExxonMobil used these record profits to pay down some of the long-term debt that it raised during the pandemic when crude oil prices plummeted. Its long-term debt is down $24 billion since peaking in the second quarter of 2020. Not only that, but this year it rewarded its shareholders with $11 billion in cash and another $10.5 billion by buying back its stock. The company has done an excellent job of managing its cash flows, which is why it has increased its dividend for nearly four decades.
XOM Total Long Term Debt (Quarterly) data by YCharts
It's investing in the green energy transition
When analyzing good dividend stocks, you'll want to consider the sustainability of their dividends. Oil and gas companies have come under pressure amid the green energy transition, making reinvesting in oil fields or new reserves less appealing. This partly explains why these companies have enjoyed such large piles of free cash flow this year.
ExxonMobil is reinvesting in its business in another way to prepare for this transition. One area where it sees an opportunity is in carbon capture and sequestration (CCS). This is the process of capturing carbon emissions, transporting them elsewhere, and safely storing them away to reduce the amount of carbon released into the atmosphere.
The company recently entered agreements with CF Industries, which makes hydrogen and nitrogen products, and EnLink Midstream to transport their carbon to its storage site in Louisianaas part of its $15 billion investment in lower-carbon energy. The market opportunity is huge, with ExxonMobil estimating the CCS market could reach $4 trillion by 2050.
A passive income stock you can trust
XOM Dividend Yield data by YCharts
Energy stocks can be highly cyclical, so managing cash flow and taking a long-term view of the business is essential to long-term success. ExxonMobil is paying down debts, rewarding shareholders, and investing in greener technology so it doesn't get left behind. With a payout ratio under 29%, a dividend yield of 3.08%, and over $30 billion in cash on its balance sheet, ExxonMobil is a passive income all-star you can confidently add to your portfolio today.
