The energy sector is highly cyclical, which is one of the most important things that investors need to understand before jumping into it. ExxonMobil (XOM -0.86%) is a giant in the industry, but it isn't immune to the normal ups and downs of energy prices. And that's why the stock's nearly 20% rise over the past year is something to consider before buying it today.
The basics
Exxon is one of a relatively small number of energy companies known as integrated energy giants. There are multiple reasons for this, including the company's massive $430 billion market cap. But to put it simply, its operations span the globe and run through the entire value chain of the energy sector, from production to processing. The stock is, generally speaking, a fairly conservative way to invest in the sector, given its inherent industry diversification.
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What's more, Exxon has an impressive history. That's highlighted by over four decades of annual dividend increases despite the highly cyclical nature of the energy industry. A rock solid balance sheet, with very low leverage (the debt-to-equity ratio is a tiny 0.2 times) is a key factor. This gives the company the ability to take on debt during industry downturns so it can continue to invest in the business and support dividends.
Dividend investors looking for a reliable company to own in an inherently unpredictable industry would do well to consider Exxon. It is highly respected and can add energy exposure for diversification purposes. But if you are looking for a cheap oil company, Exxon may not be the right choice for you.
Exxon's solid run
Energy demand plunged in the early days of the coronavirus pandemic, thanks to the economic shutdowns used to slow the spread of the illness. Exxon's financial performance nosedived, like all of its peers. And then, when oil prices recovered, the company did exceptionally well again, like its peers. However, something shifted in late 2022.
To Exxon's credit it has been able to increase output and reduce costs, so there's a reason to like it over some of its peers. However, global oil benchmark Brent crude has been falling for several quarters and Exxon has continued to outperform its closest peers. Notably, Chevron (CVX -0.90%), another U.S.-based energy giant with a strong balance sheet, is down around 6%. Perhaps investors are a little too excited about Exxon's prospects given how similar it is to Chevron.
In fact, the performance numbers are telling here. Exxon's revenue and earnings spiked when oil prices were heading higher. And now they have begun to decline as oil prices have headed lower. Maybe the company is executing relatively well, but it certainly hasn't found a way to avoid the inherent cyclicality of the energy sector. So, if you are looking at energy stocks you need to take that into consideration as you think about the way it is outperforming its closest peers. There might be other options that are more attractive, like Chevron, which has already priced in some bad news, if you are worried about the energy market continuing to head lower.
Not an easy answer
Exxon is a well-managed energy company with an impressive history of dividend payments. For dividend investors looking to own just one energy stock for diversification purposes, it's probably a good starting point. But if you are more active in your approach, Exxon's performance has been stronger than might be expected given the recent energy price downturn. That doesn't make it a bad company, but it does suggest that investors may be affording it a premium relative to peers. That might make other integrated energy giants look more attractive. To put a number on that, Exxon's dividend yield is 3.4% today while very similar Chevron's yield is 3.8%.
