Between Feb. 19, 2008, and Aug. 31, 2020, the Dow Jones Industrial Average contained both leading U.S. oil majors -- ExxonMobil (XOM -2.78%) and Chevron (CVX 0.37%). But after a 92-year tenure in the Dow, ExxonMobil was replaced by Salesforce in 2020, leaving Chevron as the only energy stock.
The move made sense at the time. But ExxonMobil has made impressive improvements to its business and is built to last. Here's why the dividend stock deserves to be added back to the Dow.
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1. Financial health
The simplest reason Exxon deserves to be added back is because its balance sheet is impeccable. Exxon went from having its highest net total long-term debt position in 10 years to its lowest.
The company has generated gobs of free cash flow over the last few years and has used a considerable amount of that cash flow to restore quality to its balance sheet.
Investors regularly turn to the Dow for industry-leading, reliable blue-chip businesses. Having weaker financial health or using too much leverage could have been why Exxon was removed from the Dow instead of Chevron in 2020.
2. Improved cost structure
Between 2019 and the end of 2023, Exxon achieved $9 billion in structural cost savings. In December, it published a corporate plan out to 2027, which called for $6 billion in additional structural cost savings. On its fourth-quarter 2023 earnings call, it reiterated that goal.
The cost savings will mainly come from "consolidating value chains and centralizing key activities including maintenance, supply chain, procurement, order to cash, financial reporting, planning, and analysis, and trading will enable further efficiency and execution effectiveness." These cost savings should make Exxon better positioned to navigate the next downturn.
3. Portfolio optimization
ExxonMobil has built a portfolio that is tailor-made for mid-cycle conditions. In other words, it can do well even when oil and gas prices are mediocre.
In October, Exxon announced plans to buy Pioneer Natural Resources, bringing its Permian Basin production to 1.3 million barrels of oil equivalent per day (boe/d). Exxon expects its Permian production to reach 2 million boe/d by 2027, which would be nearly half of its forecasted 4.2 million boe/d target by 2027.
The Permian is a good example of high-quality, low-cost production that is also a short-cycle investment. Short-cycle shale plays have more flexibility than long-duration offshore oil and gas investments whose returns are based on several years, if not decades, of operation. ExxonMobil expects that 90% of its capital expenditures have a payment period of less than 10 years, which is partially due to the short-cycle nature of its Permian Basin acreage and the low cost of supply from its other plays.
Exxon's corporate plan is based on $60 per barrel Brent -- which is the international benchmarking unit. It's a healthy number to plan capital investments around. Looking back over the last five years, Brent crude oil prices have remained above $60 a barrel excluding the COVID-19-induced downturn.
Brent Crude Oil Spot Price data by YCharts
Aside from oil and gas, Exxon is putting capital into low-carbon investments like carbon capture and storage. Its portfolio of low-carbon investments is expected to generate returns of approximately 15%, giving Exxon a clear path to profitability even in an energy transition.
4. Steadfast commitment to its dividend
$60 Brent gives Exxon a sizable margin of error. But even then, a downturn will eventually push Brent prices far below that price. In the past, Exxon has pulled back or eliminated buybacks during downturns and slashed its capital expenditures. Yet for 41 consecutive years, Exxon has not only paid its dividend but raised it every year.
Exxon pays the third-most dividends of any U.S.-based company, behind only Apple and Microsoft. However, at the pace it raises its dividend, it will probably surpass Apple in a year or two.
Exxon's consistent dividend -- despite being in a volatile industry -- would make it a worthy addition to the Dow.
5. Dow dynamics
The latest Dow shake-ups have added companies with either low dividend yields or no yields. Those additions, paired with the outperformance of low-yield stocks like Microsoft, have brought the index's yield down to just 1.8% -- which is far from high-yield territory.
Adding a quality dividend stock like ExxonMobil -- which yields 3.4% -- would boost the overall yield of the Dow without tilting the balance. The Dow is a price-weighted index, so the rather arbitrary price of a stock actually does matter (unlike in market cap-weighted indexes like the S&P 500).
The median price of a Dow stock is around $175 to $180. Exxon would be considerably below that, while Chevron is slightly below the median with a price of around $155.
Exxon's inclusion would pave the way for the addition of Alphabet and other stocks that also deserve to be in the Dow but don't pay dividends. Alphabet split its stock around the same time as Amazon in the summer of 2022, but it would be overkill to add Amazon and Alphabet at the same time. Given that the Dow needs exposure to the social media industry, Alphabet is probably the next growth stock in line to join the index.
A dividend stock you can count on
Exxon should be added back to the Dow under the same criteria it was kicked out in 2020. Only this time, it gets far better than a passing grade.
Exxon is down less than 10% from its all-time high, and the stock isn't as cheap as it used to be. But the business is executing on virtually every level, and it has set clear expectations so that investors can hold it accountable. Exxon remains a foundational dividend stock worth considering now.
