Often, the best time to buy a dividend stock is when Wall Street absolutely hates it, and it's hard to argue that Mr. Market doesn't have it in for integrated oil giant and dividend aristocrat ExxonMobil (NYSE: XOM). In fact, Exxon is now trading at its lowest level in a year, so let's take a look at two reasons now maybe an ideal time for long-term dividend investors to snatch up shares of this energy blue chip.
Exxon is historically undervalued
As this chart shows, Exxon's share price is now, courtesy of the oil crash, not just at a new 52-week low, but at its lowest point in over three years.
However, what most investors may not realize is just how undervalued Exxon is relative to its historical valuations.
|ExxonMobil||Current||10 Year Average/Range|
|Price to Operating Cash Flow||8.4||11.0|
|Price to Tangible Book Value||2.06||2.19-4.55|
In fact, as the current price/tangible book value shows, one could argue that Exxon is trading at the cheapest levels in over a decade. That means now truly is an excellent long-term opportunity to buy one of America's premier dividend aristocrats.
Exxon is one of the most consistent and safe dividend stocks you can own
Exxon has increased its dividend every year since 1983, a 32-year time frame that spans no less than six oil crashes, including the current one.
In fact, over the past 25 years, Exxon's dividend has grown at 6.5%, a rate that exceeds the S&P 500's median dividend growth rate of 5.2%.
Only in recent years has the S&P 500's dividend growth rate surpassed Exxon's. However, that hasn't stopped this blue-chip dividend champ from still trouncing the market in total returns over the past 20+ years -- despite this past year's 23% share price decline.
Given that the company recently hiked the dividend by 6%, I expect this long-term dividend growth trend to continue. That's especially true given that Exxon is one of just three U.S. companies with a AAA credit rating from all three major credit rating agencies -- higher than even the U.S. Treasury.
This means Exxon can borrow at very cheap levels whenever its free cash flow falls below levels needed to pay for its generous buyback and dividend programs. In fact, back in March, Exxon sold a record $8 billion in bonds, including $1.75 billion of 10-year notes -- the largest single portion of the offering -- at 2.71%, just 0.58% above 10-year U.S. treasuries at the time.
Don't get me wrong -- filling in cash flow gaps to pay for buyback and dividend programs with debt is a short-term strategy only. However, Exxon's return on invested capital over the last 12 months has been 14.2%. Thus, I think it's likely the company will be able to generate sufficient returns on its debt to not only service its bonds, but also continue paying and growing the dividend, even if oil prices remain low for a prolonged period of time.
Takeaway: Market's hyper pessimism means a perfect time to load up on bargain shares
Warren Buffet famously said to "be greedy when others are fearful," and thanks to growing uncertainty about the timing of an eventual oil recovery, Wall Street is terrified of oil stocks right now.
While I can't say how long oil prices will stay low -- and in fact, anyone who says they can is probably crazy -- I do know one thing: Exxon's rock-solid balance sheet, immense diversification across the oil industry, and enormous scale means it will likely be able to sail through this oil crash like it has so many others. I think this is the perfect time for long-term dividend investors to lock in a historically high yield on one of America's safest dividend growth blue chips.