ExxonMobil (NYSE:XOM) has been paying a steadily increasing dividend for decades. It rakes in many billions every quarter, but it also invests and pays out many billions of its cash flow. But with the recent painful slide in oil prices, can an oil company keep paying and growing its dividend forever? The answer to that question may surprise you after studying the real effect of oil prices on ExxonMobil's financial situation.
Oil prices collapsing? Don't sweat it
During the third-quarter earnings conference call, VP Jeffrey Woodbury was quick to assure investors:
ExxonMobil's financial results reflect the strength of the integrated business model, which creates unique competitive advantages and allows us to generate long-term shareholder value regardless of market fluctuations over the business cycle.
For an integrated oil company like ExxonMobil, this means the company loses some profit on oil production, but tends to make up for it with refining and chemicals that actually benefit from cheap prices with expanded profit. Similar to many other commodities, it's easier to mark them up higher when the input costs are cheaper. In a word, "diversity" protects ExxonMobil's earnings and cash flow.
During the Q&A of the same call, Ed Westlake of Credit Suisse put it well. He commented, "So obviously your net income margins probably surprised most people, they seem to go up as the oil price pulled back." Woodbury commented ExxonMobil is up in profit by $3 per barrel year-to-date when the entire business is considered. Cheap oil prices have their benefits for ExxonMobil and it shows.
How did Exxon do last quarter anyway?
The third quarter was more of the usual. ExxonMobil raked in over $8 billion in net income for an increase of 3%. Diluted earnings per share were even better, up 6% to $1.89. The company paid around $2.9 billion in dividends and bought back $3 billion worth of stock. The year-over-year dividend per share increased 9.5% to $0.69.
It's interesting to note as with all buybacks of just about any company, all things being equal, it's easier to raise dividends per share as a result of buybacks leaving less slices of the pie to distribute to. For ExxonMobil specifically, the 3% or so annualized retirement of shares means 3% of its higher dividend is paid out without actually increasing its total cash flow outlay to pay it.
Can ExxonMobil keep affording the dividend?
The company obviously has huge cash flows, but also huge liabilities in the triple-digit billions, which may be a concern at first glance to anybody peeking at ExxonMobil's balance sheet. However, at least as of earlier this year, ExxonMobil is only one of three companies with the top AAA credit rating. Even Warren Buffett's Berkshire Hathaway doesn't make that grade.
ExxonMobil prides itself on, according to Woodbury, "industry leading shareholder distributions." Woodbury said the company's priority, second only to capital investments in accretive business opportunities, is to pay "reliable and growing dividends." The company has raised its dividend by about 10% every year for the last decade.
Between its cash flow, apparent oil price cyclical insulation, awesome credit, and verbalized commitment to take care of shareholders, the dividend seems sustainable, here to stay, and expected to grow if history is any guide. As with any stock, there is always principal risk regardless of the dividend. Overall, I think the potential outweighs the risk and should be considered as part of a well-diversified portfolio.