In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal, but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is ExxonMobil (NYSE: XOM), which posts a 2.1% dividend yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

8.8%

Source: Exxon investor relations.

There's no question that ExxonMobil has a very good dividend track record -- it's been paying dividends for over a century and has raised its payout for 28 consecutive years.

Nevertheless, the growth rate over the past five years was below 10%, so it scores a still-respectable 4 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

158 times

10%

5

EPS payout ratio

27.9%

10%

5

FCFE payout ratio

38.9%

30%

5

Source: Capital IQ, a division of Standard & Poor's, as of March 14.

Exxon has one of the best balance sheets in the U.S. markets, fortified with good assets and plenty of earnings to pay creditors back many times over. It's little surprise, then, that Morningstar gives Exxon a "AAA" credit rating.

The dividend has also been consistently covered by earnings and free cash. Put simply, the current dividend appears very sustainable.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

27.9%

10%

4

FCFE payout ratio

38.9%

20%

4

Sustainable growth rate

16.9%

10%

5

Exxon spends a lot of its free cash repurchasing shares -- in 2010, for instance, it repurchased $13.1 billion worth of its stock and paid $8.5 billion in dividends. Fortunately for dividend investors, that ratio has improved since 2006, when it repurchased nearly $30 billion in shares and paid out $7.6 billion in dividends. The company could conceivably pull back on less "sticky" stock repurchases and further fund dividends.

Analysts expect long-term earnings growth to be around 6%. I would expect annualized dividend growth over the next five years to roughly approximate that rate in the 6%-8% range.

Competitors
An "ungraded" section of the dividend report card compares a stock's current yield against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or cut the payout, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Chevron (NYSE: CVX)

2.9%

1.4%

ConocoPhillips (NYSE: COP)

3.5%

(2.9%)

BP (NYSE: BP)

3.9%

16.0%

With its current yield at 2.1%, Exxon's dividend yield is a bit lower than this peer group, but its growth prospects seem much better, as well (BP is coming off a very low profit base after the spill). Still, this may provide a tailwind for future dividend growth if the board wants to bring the payout more in-line with peers.

Pencils down!
With all the numbers in, here's how Exxon's dividend scored:

Weighting

Category

Final Grade

10%

History

4

 

Sustainability

 

10%

Interest Coverage

5

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

5

 

Growth

 

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

4

10%

Sustainable growth

5

100%

Total Score (out of 5)

4.6

 

Final Grade

A

Exxon has been a very strong dividend payer for decades and judging by the DRC score, it seems to be in a good place to continue that tradition. Considering its modest dividend growth potential, however, prospective investors may be turned off by the relatively low current yield.

Have you added Exxon to your Watchlist yet? Well what are you waiting for?

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He does not own shares of any company mentioned. Chevron is a Motley Fool Income Investor pick. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.