ExxonMobil (XOM -0.28%) is not the perfect energy stock for every investor. But if you have a conservative bias, this consistent dividend payer should be high up on your list in the energy sector. Here's why now, with oil prices at fairly attractive levels, is a good time to consider this integrated giant over some other energy options.
1. Smoothing out the bumps
Exxon is what's known as an integrated energy major. That means it has exposure to the entire energy chain from the upstream (where it drills for energy), through the midstream (the pipelines and other infrastructure that moves energy around the world), and all the way to the downstream chemicals and refining arena. It's also globally diversified.
This balance of businesses doesn't exactly protect Exxon from the cyclical energy industry's often dramatic price swings. But it does help to soften the blow when energy prices are trending lower as the downstream uses oil and natural gas as inputs. So low prices are usually a net benefit to profitability in the segment even as the upstream area is seeing less revenue.
XOM standard deviation of monthly returns (all) data by YCharts.
One way to quantify the stability of the company's business is by looking at the relative stability of its share price over time. A key metric here is standard deviation, which looks at the degree to which prices vary from their average. As the chart above shows, Exxon's standard deviation is lower than a multitude of other options in the energy space. That's not all because of its business model, but the integrated approach is an important part of the story.
2. Sending out the checks
One thing separating Exxon from its integrated energy peers is the company's 40-year history of annual dividend increases. That's pretty impressive when you consider the cyclical nature of the energy sector. It is also the longest increase streak in the peer group, which includes BP, Shell, TotalEnergies, and Chevron. That said, the last few years have been pretty notable on the dividend front.
XOM dividend per share (quarterly) data by YCharts.
The names in the 10-year quarterly dividend chart above have been cherry-picked, but they highlight that Exxon's dividend is very consistent. Devon Energy (DVN -0.31%) has a variable dividend policy, which resulted in a swift increase in the payment when oil prices were on the rise. The dividend has been cut two quarters in a row at this point, now that oil prices have pulled back from recent peaks. That might work for some investors, but not if you are looking for dividend consistency.
Occidental Petroleum (OXY -0.20%), meanwhile, made an ill-timed and debt-funded acquisition just as energy markets were starting to turn lower, resulting in a dividend cut to free up cash for debt repayment. Being overly aggressive in the energy patch can lead to investors getting burned. Exxon's dividend, however, just kept on trucking along.
Long-term income investors recognize Exxon's commitment to the dividend and have historically been willing to stick out bad times, which helps to reduce stock price drawdowns. Although the incredible dividend history isn't a guarantee that the dividend will never end up being cut, it is a clear statement by the board that returning value to shareholders on a regular basis is a high priority.
3. The pressure relief valve
Another important factor that makes Exxon a great energy stock is the way it uses its balance sheet. Comparing the company's debt-to-equity ratio, a measure of leverage, to its closest peers shows that Exxon employs relatively modest use of debt.
In fact, only Chevron has a lower debt-to-equity ratio, though both are at very low levels (for any company, not just energy companies). This provides material resiliency when hard times inevitably arrive.
XOM debt-to-equity ratio data by YCharts.
What hard times look like, though, is equally important. Note that in the chart below that Exxon's debt-to-equity ratio was around 0.2 times at the start of 2020, rose to around 0.4 in 2021, and has now been brought back down to around 0.2. The overlaid price line of Brent crude, a key international oil benchmark, shows that this leverage trend coincided with the steep drop and subsequent recovery in oil prices.
XOM debt-to-equity ratio data by YCharts.
Basically, Exxon used the strength of its balance sheet by issuing debt to support its business and dividend payments when oil prices were low. When oil prices recovered, it paid down debt to restore the strength of its balance sheet. At this point, Exxon looks like it is ready to deal with an industry downturn again.
Through the cycle
If you are looking to time energy price moves, Devon Energy would probably be a better choice for you. A situation like Occidental might make more sense if you like turnaround opportunities. But if you want to hold an energy stock for the long term, Exxon should be high on your list.
That's particularly true today since fairly generous oil prices suggest caution is probably in order in this cyclical industry. Exxon's stock yields roughly 3.3%. And history suggests it can keep paying you through the normal energy cycle without making you suffer the same volatility-induced stomach upset to which other options might expose you.
