Will Lower Gas Prices Result in Higher Dividend Income from Big Oil?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A recent front page article in USA Today reported on how gas prices could be under $3 a gallon in the United States in the autumn. This might not be just a temporary fluctuation in the market. Daniel Yergin, head of IHS Cambridge Energy Research and the pre-eminent expert of the economics of oil, recently wrote about the profound changes that higher fossil fuel production in the United States will have for the global marketplace. For Big Oil companies, dividend payments could have to be hiked to compensate for the lower price of crude.
While the yields of many Big Oil stocks are above what dividend paying stocks on the Standard & Poor's 500 Index, a little more than 2%, the payout ratio lags far behind the historic average of about 50%. The payout ratio is the amount of earnings that goes for financing the dividend income component of an equity.
The size of the payout ratio tells many tales about the C-level management for a dividend paying stock. A high payout ratio is a warning sign that the company is using its dividend yield to attract investors due to the weakness of any future growth in profits. A low payout ratio manifests that the company feels the cash is better used for other purposes. Many oil companies have preferred to use cash for share buyback programs, as an example.
Based on the historic poor performance of company stock repurchasing programs, oil companies will be better off raising the dividend payments to attract and retain shareholders if low crude prices remain the norm. There is plenty of cash for this based on the current dividend yields and payout ratios at many Big Oil firms.
Exxon Mobil (NYSE: XOM) just raised its dividend to where it has a yield of 2.67%, not much above the average for a Standard & Poor's 500 stock. Its payout ratio of 22.71% is well below the mean. With a debt-to-equity ratio of just 0.10, Exxon Mobil is far from being encumbered by a crushing debt load. The profit margin for Exxon Mobil is only 8.28%, so investors are not looking at jaw dropping growth in the future. For the next year, the earnings-per-share increase for Exxon Mobil is projected to be just 6.22%.
Hess Corporation (NYSE: HES) paints a similar dreary portrait of a dividend landscape. With a payout ratio of just 10.31%, Hess Corporation has a yield of 0.92%, less than half the average for a dividend paying member of the Standard & Poor's 500 Index. Over the next five years, earnings-per-share growth is estimated to be only 7.90% for Hess Corporation. At present, the profit margin is just 3.40%.
Low profit margins, low growth prospects and low payout ratios means there should be much much higher dividend growth at major oil companies such as Exxon Mobil and Hess Corporation. Shareholders have hardly been rewarded by the present management policies as Hess Corporation is down 42.22% for the last year of market action with Exxon Mobil pretty much flat for 2012. Based on the staggering short positions on the exchange traded funds for oil, United States Oil (NYSEMKT: USO), of 40.70% and natural gas, United States Natural Gas (NYSEMKT: UNG), of 60.70%, a jump in the price of fossil fuels will most likely not be lifting the share prices of Exxon Mobil or Hess Corporation anytime soon. Big Oil needs to pump out bigger dividend payments to retain and attract shareholders.
jonathanyates13 has no positions in the stocks mentioned above. The Motley 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.If you have questions about this post or the Fool’s blog network, click here for information.