Exxon Mobil Dividend – Slowing Or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Exxon Mobil (NYSE: XOM) is by many considered to be a core holding in any portfolio. I've even seen a video on Motley Fool that called Exxon “The World's Greatest Dividend”. Granted this video was discussing the size of Exxon's dividend payments, as opposed to saying this was the best dividend in the world. Given that I've seen many articles recommending Exxon stock, you would expect the company would have a long history of increasing its dividend. You would also expect that this dividend growth is fairly consistent. Based on the last 10 years at least, you would be wrong.
The market seems to have a very bad long-term memory. While Exxon the company is doing quite well, the dividend's growth has not kept up. After all, how often can you say a company grew its operating cash flow at an over 29% compound annual rate in the last three years? Now consider that while Exxon turned in this impressive rate of growth in operating cash flow, the dividend was raised on average by 10.95% per year. Why would a company growing cash flow at near 30% only increase the dividend by an average of about 11%? My first guess was the company's payout ratio was too high three years ago.
That is not the case either. Look at the free cash flow payout ratio over the last three years, and you can see the clear trend:
Not only did Exxon barely pay out 30% of their free cash flow over the last three years, but as of 2011 that ratio had been nearly cut in half. Clearly the company isn't having a problem paying out its dividend. When you consider that Chevron (NYSE: CVX), one of Exxon's main competitors, was paying out over 42% of their free cash flow at the end of 2011, it makes you wonder why is Exxon payout out so little of what they are bringing in?
When it comes to dividend growth, the following chart tells a story of inconsistency that the market doesn't seem to remember too well:
I was actually surprised, because I didn't know that at the beginning of the last ten years, Exxon did not increase the dividend at all. You can also see that from 2006 to 2009 the overall trend was down in dividend increases. Thankfully in 2010, the company seems to have reached a turning point and the rate of dividend growth has turned up. With an over 20% increase recently, maybe Exxon is getting on the right track to the type of dividend growth that shareholders would like to see. The problem with this assumption is, growth in the future is unlikely to be like the last few years.
The oil industry is ultimately a commodity business. While consumption has increased over time, there are cyclical undertones to the industry as oil prices rise and fall. To know that oil prices have been on the rise, you need only to look at the operating cash flow of Exxon and Chevron. In the last three years, both companies show average annual increases in their operating cash flow of over 29%. In January 2009, the average price of regular gasoline was $1.85. Today, that same gallon of regular gasoline averages about $3.69. This means for Exxon to see a 29% annual increase in operating cash flow, gas at the pump had to grow by about 33% per year on average. In order for Exxon to continue to turn in these types of results, the average price for regular gasoline would need to grow to about $8.68 by 2015. If $3.69 gas is “spooking consumers” as some have reported, then anything in the $4-$5 range makes it worse, and gas at over $8 a gallon is nearly unthinkable. I'm sure that I'll see it sometime in my life, but seeing an increase like this in the next three years seems very unlikely.
Exxon saw prior earnings increase at 37%, and that caused a 29% increase in operating cash flow. If Exxon meets analysts targets, an 8% increase in earnings should result in a 6% increase in operating cash flow. So what should investors expect from their Exxon dividends going forward? A lot depends on what management feels comfortable paying as a percentage of free cash flow. In the last few years, Exxon has paid out a certain amount in dividends and then used most of the remaining free cash flow to repurchase shares. In the last three years, the company repurchased an average of $17.42 billion a year in shares. Considering that Exxon spent more than twice as much on share repurchases last year as they paid in dividends, I wouldn't be shocked if shareholders would prefer to see that scale tip the other direction. In the last 9 years of increased dividends, the average increase is about 11% per year. With such a low payout ratio, I wouldn't be surprised to see Exxon increase the dividend at a rate above earnings growth. My best guess would be 10-15% dividend growth stemming from an increase of 8% in earnings. With the company starting with a measly 16% payout ratio, it would take many years for this ratio to climb even to 50%. With the stock selling for about 10 times earnings, and paying a yield of 2.76% the stock seems to be fairly valued. The huge growth in earnings and cash flow might be over for now, but shareholders should be pleased if they get the 10-15% dividend growth that should be easily achievable over the next several years.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. 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.
