Exxon Mobil (NYSE:XOM) stock is very attractive given its high dividend yield and other value markers. For example, at today’s price, $42.50, the annual dividend represents a dividend yield of nearly 8%.
I pointed out in prior articles that Exxon Mobil’s management said maintaining the dividend is a priority. I also showed Exxon plans on cutting capital expenditures and operating expenses. It can afford the dividend cost.
Of course, if oil rises from its doldrums at around $40 per barrel, the stock will rally. But everyone is worried that the novel coronavirus resurgence will slow economic activity.
Oil Supply and Demand
Barron’s reported recently that the International Energy Agency (IEA) wrote a report saying that a 2020 second-half recovery in oil has downside risk.
As a result, demand is falling in gas-hungry southern states from increased social distancing and new lockdown. But OPEC+ cut output by a record 9.7 million barrels per day for May, June and July.
The cuts were even more than OPEC+ nations had agreed to. Saudi Arabia added additional cuts, according to the IEA. U.S. producers shut down most of their activity. This has helped bring oil supply into balance with demand.
Rystad Energy oil analyst Louise Dickson says the rise in coronavirus cases in 2020 is a problem. Oil could move down again if the economy keeps slowing.
On the other hand, supply is severely distressed. Derren Geiger, an industry analyst, quotes a Deloitte report that half of all U.S. exploration and production companies are either insolvent or severely financially stressed.
Geiger quotes sources that if oil average less than $40 per barrel in 2020, 70 E&P companies could file bankruptcy. An additional 170 more could follow in 2021. This would be the deepest consolidation the industry has ever encountered, according to Deloitte.
This will balance the oil supply with demand. However, if a vaccine emerges soon, oil could rise as economic activity picks up.
What Analysts Are Saying About Exxon Mobil
Yahoo Finance‘s poll of 23 analysts estimate Exxon Mobil’s earnings per share will average $1.48 next year. These EPS figures range from negative earnings to $3.48. Most analysts expect earnings will be negative this year.
However, that puts the stock on a high forward price-earnings ratio of more than 29. This is a very high historical ratio number for XOM stock. Analysts obviously expect a more significant recovery in 2022.
Exxon’s recent 8-K filing provided guidance on Q2 earnings. Estimates range between -43 cents and -95 cents per share. The average estimate is a loss of 69 cents per share. Clearly this does not support the current quarterly dividend of 87 cents per share.
Barron’s quoted one analyst, Jason Gabelman of Cowen. He implied that the dividend might not be safe. Therefore, Exxon will have to reduce its capex spending if economic growth falters.
Exxon Mobil Stock Trades As If the Dividend Will Be Cut
Today’s 8% dividend yield is one of the highest yields at which it has ever traded. According to Seeking Alpha, the stock has averaged a dividend yield of 4.6% in the past four years. So far, in 2020, the yield has had a range of between 7.3% and 11%.
However, management was very clear last quarter. It will not cut the dividend. Exxon will likely declare the dividend this week or early next week. It usually announces the dividend prior to its quarterly earnings release.
Therefore, if the dividend stays level, XOM stock will rally. It will move closer to its average historical yield.
This will be the sixth quarter that it has paid the 87 cents per share quarterly dividend. Normally, the company raises its dividend after every four quarters. You can see this in the chart at the right.
For example, Exxon Mobil stock is worth $75.60 per share. This is based on its average 4.6% yield. That represents a 74% gain over today’s price. Either way, long-term investors in Exxon Mobil will be patient. They know oil is likely to rise again.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.