Exxon Mobil Corp (XOM) is the largest publicly traded oil company in the United States.
The company produces 2.2 million barrels of oil a day and over 11.8 billion cubic feet of natural gas. The company is the largest refiner and marketer of petroleum products. Exxon Mobil in the past has been a strong blue chip stock for investors seeking stability, dividends, and some conservative investors. Given the recent market volatility, I decided to explore more options for solid dividend paying companies that may go on “sale” in the near future.
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As mentioned previously, one of the strongest advantages to investing in Exxon Mobil is its dividend. A recent article in Forbes discussed how Exxon Mobil has been ranked a top dividend paying stock by “Dividend Rank.” Although no dividend is entirely safe, Exxon Mobil has a long dividend history and a strong financial position. The current yield on Exxon shares is about 2.6%. This dividend can be extremely beneficial in volatile market conditions as it provides current cash flow and opportunities for dividend reinvestment at various share price entry points.
Another reason that many choose to invest in Exxon Mobil is due to its history of market outperformance. Taking a look at the long term chart, you can see that Exxon has done an excellent job of outpacing the S&P by a large margin. The company has also managed to outperform its industry peers over the long term.
Besides these two factors, fellow Seeking Alpha author “Sure Dividend” wrote an article I found valuable about some of the pros to investing in Exxon. Future growth needs outlined by Sure Dividend include growing global energy demand due to population growth and rising GDP in developing markets. I agree with the author that even with the popularity of renewable energy sources, oil and gas will still provide the majority of energy to meet the world demands for the foreseeable future.
Despite the history behind Exxon and the potential catalysts and advantages to investing in Exxon mentioned above, the stock also comes with risks.
The long term chart above showed that Exxon has done an excellent job of outperforming the market over the long term, but a more short-term chart from 2009 to present paints a different picture. The table below shows that Exxon has been unable to keep pace with the S&P or its industry competitors in stock performance. Although I focus on long-term investing, the margin in which Exxon lags the S&P can be concerning.
Beyond the shorter term chart, what also worries investors is Exxon’s current valuation. Despite the fact that the share price has not appreciated as much as investors would have liked in recent years, the shares still appear to be overvalued. By looking at only the price to earnings ratio, an investor may believe otherwise. Exxon currently trades at a price to earnings of around 13.5, which is below the S&P average of 18.2 but above the industry average of around 12.9. When factoring in the growth of Exxon, the picture doesn’t look as promising unfortunately. According to Morningstar, Exxon currently has a PEG ratio(Price to earnings in relation to its growth rate) of 2.8.This indicates that Exxon is currently trading at a multiple nearly triple its growth rate, which would conceptually signal that the stock is overvalued at current levels.
It is also important to mention other risks that are still relevant. These risks include economic factors, political and Government factors, and possible legal restrictions. Much of the demand for Exxon’s services will also coincide with economic growth. The general economic conditions throughout the world can play a large impact on the company’s end results. Potential Government regulations and political changes could also potentially change the current operating environment for Exxon.
In conclusion, I believe Exxon Mobil is a very strong company with an excellent history. The reasoning behind researching Exxon was to look for a stable profit play to purchase during the current market volatility situation. The promise of potential share buybacks and dividend increases could make the stock attractive to long term conservative investors, but the shares seem too overvalued at current levels. With the bond market facing potential volatility in the future as well, conservative investors are running out of options. The dividend is one of Exxon’s strongest advantages, but, unfortunately, its industry yields an average of 3.4%, which is above Exxon’s 2.6%. Given the large PEG ratio, lower than industry average dividend, I feel even an ETF like VDE may be a more suitable alternative. VDE is Vanguard Energy ETF, which can provide increased diversification, some dividend yield, and has a history of outperforming. Although Exxon is a well-run company, investors may find better returns elsewhere.
Disclaimer: This article is given for informational purposes only and is not to be construed as investment advice. Contact your investment professional and do your own due diligence before investing.