Speaking of balance sheet, you’ll note that while Exxon has a lot of absolute debt, its interest coverage ratio of 44.1 means that the company has no problem servicing its liabilities. That’s largely thanks to having an incredibly low cost of debt, courtesy of having the strongest, least leveraged, balance sheet of all the integrated oil majors.
As seen below, Exxon’s low leverage ratio and strong capitalization position it well to continue tapping credit markets at favorable rates. The company should have no problem continuing to issue debt to pay dividends until energy markets recover.
Investors can also take comfort in management’s comments about prioritizing the dividend:
“The dividend is a high priority because it’s part of why we are important to long-term shareholders…We run the business for people that are going to own these shares a very long time, that we hope the shares are in the trust that they leave their children and grandchildren. Whenever we run into challenges and I have to think about how am I going to pay the dividend, I think about those people. And so we are going to pay that dividend. That’s why we are important to people. We will borrow to invest. These projects have returns that are multiples over our borrowing costs.”
Source: ExxonMobil Analyst Day
Importantly, Exxon expects to achieve cash flow neutrality by next year with oil between $40 and $80 per barrel. Low financial leverage and a strong credit rating provide Exxon with the capacity to continue paying dividends and investing in profitable projects as well. Here is another comment from management at the firm’s analyst day:
“If we need to borrow to invest, we’ll do that, because if I’m borrowing money at rates that we got yesterday, and if I can’t generate a return multiples of that, then somehow I have messed this thing up.”
Overall, Exxon’s current earnings and free cash flow are clearly not enough to support the dividend. However, the company can continue pulling several levers (e.g. non-core asset sales; cost reductions; debt issuance; production growth) for at least several years to continue paying dividends until the commodity environment has improved. Investors should continue to monitor Exxon’s most important financial ratios.
Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Exxon’s Dividend Growth Score is an 8, owing to the current low oil & gas prices, and the difficulty this puts on the company’s ability to maintain the current dividend, much less grow it.
Then again, Exxon’s dividend history can be traced back more than 100 years ago to 1911. The company is a dividend aristocrat that has raised its dividend for 33 consecutive years through the end of 2015, recording 6.4% average annual dividend growth over that time period. You can see a list of all dividend aristocrats here.
Source: Simply Safe Dividends
While many other oil companies have either maintained or reduced their dividends, Exxon raised its quarterly payout by 6.7% in 2015 and 2.7% earlier this year. The latest payout raise marks the company’s 34th consecutive annual dividend increase.
What makes this dividend aristocrat even more impressive is that there were no less than four major oil crashes during that time, including the current one.
