When commodity prices decline, it is bad for upstream. But ExxonMobil’s downstream and chemicals businesses still produce earnings and help the company stay profitable. Non-integrated energy businesses do not have the same level of stability.
These qualities helped ExxonMobil navigate the 2008-2009 recession, which was a period similar to the current environment, in which commodity prices fell significantly. Still, ExxonMobil remained profitable throughout the Great Recession.
– 2007 earnings-per-share of $7.26
– 2008 earnings-per-share of $8.66
– 2009 earnings-per-share of $3.98
– 2010 earnings-per-share of $6.22
Oil prices fell by around 50% from 2008 through 2009… But ExxonMobil remained profitable. ExxonMobil is the largest and most powerful oil company in the United States. It is the ‘black gold standard’ in the industry.
Valuation & Expected Total Return
Analysts expect ExxonMobil’s earnings to grow 68% next year. Its large upstream projects will likely be a major contributor of this growth. Oil prices will not fall forever. When they rise, ExxonMobil’s earnings will surge.
ExxonMobil increased its dividend by 2.7% in 2016, which was its 34thconsecutive year of dividend increases. ExxonMobil is a Dividend Aristocrat, and has paid a dividend for more than 100 years. ExxonMobil stock has an above-average 3.4% dividend yield.
It’s difficult to value ExxonMobil based on its earnings alone – because they are so volatile. The company’s book value is much more stable. Over the last decade, ExxonMobil has traded for an average price-to-book ratio of around 2.7. The company is currently trading for a price-to-book ratio of 2.1.
Even the more stable book value isn’t a perfect gauge of ExxonMobil’s valuation multiple. It is very likely that the company’s value will rise significantly when oil prices rise, thanks to both increases in earnings and valuation multiples.
I expect the company to generate earnings-per-share growth of 4% to 6% a year over the long run. This growth combined with the company’s current dividend yield of 3.4% gives investors expected total returns of 7.4% to 9.4% a year, before changes in the valuation multiple. As discussed above, it’s more likely than not that the company’s valuation multiple increases from current levels when oil prices rise.
Final Thoughts
Exxon Mobil Corporation (NYSE:XOM) operates in a highly cyclical industry, but it has generated very strong returns over a long period of time. The company does an excellent job of cutting costs to keep returns on capital high.
It has a proven ability to navigate the ups and downs of the oil market exceptionally well. While its performance can be volatile depending on commodity prices, ExxonMobil is an excellent stock to hold over the long run for investors looking for high dividends and (relative) stability in the energy sector.
The company is one of the 6 oil and gas ‘super majors’ – and is likely the safest investment among the 6.
Note: This article is written by Bob Ciura and originally published at Sure Dividend.
