On Feb. 2, ExxonMobil (XOM -2.78%) reported its second-highest year of earnings over the last decade. And there could be even more growth to come in the years ahead.
Exxon's record earnings in 2022 were a bit of an outlier. Oil prices surged in response to Russia's invasion of Ukraine, geopolitical tensions, and strong demand. 2023, which featured lower oil and gas prices, could be a glimpse of what's to come for Exxon.
Exxon is laying the groundwork for sustained earnings growth. A lot of it has to do with cost reductions and portfolio improvements. But Exxon is also putting capital to work and boosting production from high-quality assets.
Exxon's acquisition of Pioneer Natural Resources (expected to close in Q2 of this year), paired with a whopping $26.325 billion in capital and exploration expenditures last year, paves the way for a ramp-up in global project development -- with several milestones expected in 2025.
Here are five reasons why ExxonMobil is a terrific dividend stock to buy now.
Image source: Getty Images.
1. Plenty of cash to go around
Exxon's earnings were the headline figure from its latest report. But the cash flow is even more impressive.
One of my favorite slides from Exxon's fourth-quarter earnings presentation was its cash position at year-end 2022 versus year-end 2023. Exxon had $29.7 billion in cash at the end of 2022. It made $55.4 billion in cash flow from operations and $4.1 billion from asset sales, and then spent $23.4 billion on capital expenditures for a total of $36.1 billion in free cash flow, of which it distributed $32.4 billion to shareholders through dividends and buybacks.
All told, Exxon ended 2023 with $1.9 billion in additional cash on the balance sheet -- showing that it can fund its operations and future growth and support an expensive share repurchase and dividend program with cash.
Exxon should be able to generate even more cash once it fully integrates Pioneer and continues to develop some of its longer-term downstream projects, Guyana production, and liquefied natural gas projects.
2. Structural cost savings
On Dec. 6 of last year, Exxon released a corporate plan heading out to 2027. One of the plan's key components is cost savings of $15 billion between 2019 and 2027, with $9 billion in savings expected between 2019 and 2023.
Exxon exceeded that goal, reporting $9.7 billion in structural cost savings between 2019 and 2023. Specifically, Exxon noted $2.3 billion in savings for 2023, including $700 million from Q4 alone.
Reducing costs by operating a more efficient business will help boost returns, which could fuel accelerated growth. But more importantly, cost reductions give Exxon an added cushion for the next downturn.
3. A near-perfect balance sheet
Exxon finished 2023 with a debt-to-capital ratio of just 16% -- around the lowest level in the last eight years. The company lowered its long-term debt position by 7.6% to $37.48 billion and raised its cash position by 6.4%.
All told, Exxon finished the year with a net debt position of just $5.9 billion -- the lowest in over a decade.
In the capital-intensive oil industry, being able to fund operations and growth with cash is paramount. Having a strong balance sheet gives Exxon flexibility if there is a downturn. 2020 was a good example of this. Exxon was able to fund its operations and grow its dividend in 2020 despite losing money because it was able to leverage its balance sheet. The strategy is unsustainable, but it can get Exxon out of a jam when necessary. Fast forward a few years, and Exxon is in even better shape than it was before the pandemic.
4. A healthy capital return program
In the third quarter, Exxon announced a dividend raise to $0.95 per share, marking the 41st consecutive annual dividend increase.
Exxon's dividend raises haven't been too extreme. The company usually raises its dividend by a few percentage points a year. Over the last decade, Exxon stock is only up 13.6%, while its dividend is up over 50%. Since the dividend has grown at a faster rate than the stock price, Exxon's yield is now relatively high at 3.7%.
Exxon's dividend track record and yield are solid in their own right. But what really makes the capital return program attractive are the buybacks.
Exxon spent $14.9 billion in dividends and $17.4 billion in stock buybacks in 2023 -- reducing its outstanding share count by 3.6%. As mentioned earlier, Exxon is supporting its capital return program with cash, while also lowering its overall net debt position.
5. Upping the ante on low-carbon investments
Exxon's excellent results, growth trajectory, cash flow, dividend, buybacks, and financial health all play into the long-term investment thesis. But so does the energy transition.
Exxon has a stated goal to reach net-zero emissions by 2050, which sounds unlikely coming from an oil and gas company. To support that goal, Exxon has made strides in reducing flaring and cleaning up its operations. But it is also investing in low-carbon solutions and carbon capture and storage.
In its corporate plan through 2027, Exxon announced that it is pursuing more than $20 billion in lower carbon opportunities. Exxon is making these investments to achieve its sustainability targets and to make money. In fact, it expects to generate returns of around 15% from its low-carbon investments.
In November of last year, Exxon completed its $4.9 billion acquisition of Denbury Inc., which which uses a unique oil extraction method that involves injecting carbon dioxide into the reservoir, therefore storing CO2 along with getting more oil from a depleted reservoir. The segment focuses on carbon capture and storage, hydrogen, ammonia, biofuels, and direct air capture. In other words, Exxon is investing in low carbon mainly through the oil and gas industry instead of renewable energy like solar and wind.
The complete package
ExxonMobil has a price-to-earnings (P/E) ratio of just 11.5, less than half of the S&P 500's P/E ratio of 26.9. Yet the real reason why the stock is a good value is because of all the reasons discussed.
In 2023, Exxon proved that when Brent crude oil averages a price in the low-$80-per-barrel range, it can fund its operations, long-term investments, dividend growth, buybacks, and low-carbon investments with cash. Exxon doesn't need a super high oil price to check all the boxes. Exxon can simply pull back on buybacks if oil prices fall. And if there's a particularly brutal downturn, it can do what it did in 2020 and lean on the balance sheet.
Exxon is giving oil and gas investors everything they could ask for and remains a foundational dividend stock worth buying now.
