Like most of its peers, ExxonMobil (XOM -0.21%) had a blockbuster year in 2022, financially speaking. But when it comes to the dividend, it was increased a scant 3.4% in the fourth quarter. And when management reported full-year earnings, the dividend remained unchanged.
There's a reason for the modest 2022 hike and a reason why dividend investors expecting a hike early in 2023 are likely to be disappointed.
What a year
When U.S. energy giant Exxon reported fourth-quarter and full-year 2022 results, the news was pretty impressive. Adjusted earnings per share rocketed to $3.40 per share in the fourth quarter of 2022 from $2.05 a year earlier. Full-year adjusted earnings tallied $14.06 per share, well more than double the $5.38 per share earned in 2021.
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CEO Darren Woods noted, "The hard work and commitment of our people enabled us to deliver industry-leading operating and financial results and shareholder returns in 2022." He attributed the impressive results to the fact that "we leaned in when others leaned out." That last statement reflects the company's still-high level of capital investment, even when the industry was facing headwinds in 2020.
The shareholder returns Woods highlights in 2022, however, is more about the stock price than anything else. Exxon's stock rose 80% in 2022, compared to a roughly 50% increase at Chevron, around 31% at Shell and BP, and just 25% for TotalEnergies. These four integrated energy giants are Exxon's most similar peers.
What was comparatively less than impressive in 2022 was Exxon's dividend increase, noted above, at just 3.4%.
A new paradigm
The first thing to recognize about Exxon's dividend is that the business supporting it is highly cyclical and prone to dramatic upturns and downturns. To highlight that fact, in 2020 the company's earnings were negative to the tune of $0.33 per share. So it isn't reasonable to expect a blockbuster year to lead to a massive dividend increase. The business simply couldn't support that type of hike over the long term, and it would most likely lead to a dividend cut. That is not something that long-term dividend investors would appreciate.
But that brings the story back to the dividend. Exxon's dividend has increased annually for four decades. It is one of the reasons why dividend investors like the stock. And yet Exxon's dividend has not been increased each year of that 40-year span. That may not sound right, but it is thanks to the timing of dividend increases. Notably, the dividend was increased in the second quarter of 2019, and then it remained static at $0.87 per share until the fourth quarter of 2021, when it was increased to $0.88 per share.
That means the dividend spent 10 quarters at the same rate, or roughly two and a half years. However, because the change was made in the middle of 2019, the full-year 2020 dividend was higher than it was in 2019. And the last quarter increase in 2021 meant that the full-year 2021 dividend was higher than the dividend paid in 2020. So the annual streak remained intact, despite the lack of a dividend increase for two and a half years. The most recent increase, meanwhile, was the modest hike made in the fourth quarter of 2022. Having repeated the pattern timing from 2021, investors should probably go in expecting an annual increase late in 2023.
But if Exxon isn't returning its huge profits back to investors, what is it doing with the money? A key focus is continuing to invest in its highest quality oil and natural gas projects, highlighting the 30% increase in production out of Guyana and the Permian last year. It's also working to reduce the environmental impact of its drilling, with a material reduction in natural gas flaring in the Permian in 2022. And it is dipping its toes into clean energy, investing in things like biofuels. Perhaps most important of all, it is reducing leverage (it paid off $7.2 billion in debt in 2022) so its balance sheet is strong enough to weather the next industry downturn.
The new, same old approach
All in, Exxon is still a dividend machine, but investors need to understand that industry dynamics warrant caution on the dividend front, lest the company end up having to cut the dividend later. And, just as important, the timing of dividend increases appears to have shifted out to the fourth quarter.
So things are different, but they are also the same. What hasn't changed at all, however, is the company's long-term commitment to returning value to shareholders via dividend growth, in good years and bad.
