Exxon Mobil Corporation (XOM): Safe Haven for Oil Dividend Investors During the Oil Crash

That’s because the fracking revolution, when combined with the massive Utica and Marcellus shale gas formations of Ohio, and Pennsylvania, have resulted in natural gas prices crashing to their lowest price in half a decade.

Source: Oilprice.com

As seen below, demand for natural gas is projected to grow nearly twice as fast as demand for oil on an annual basis over the next 25 years.

The increased production of higher-margin liquids, when combined with the fact that the world will still likely be dependent on oil and gas for several more decades, means that Exxon’s future profits and free cash flow are likely to eventually climb to all new record levels.

Which will provide this very shareholder friendly management team with plenty of resources to keep rewarding dividend lovers with many more decades of strong, secure, and steady payout growth.

Valuation

If you only look at Exxon’s P/E ratio, the stock might appear currently overvalued. However, remember that this is a highly cyclical industry, and during a downturn the P/E ratio tends to soar to high levels as earnings decline.

However, analysts are expecting things to improve in the next few years, thanks to the company’s ongoing cost cutting measures, and the expected increase in production, and thus cash flow, as new projects come online.

A different way of looking at the current valuation is to compare the current dividend yield of 3.4% to its five year historical average of 2.8%. From that perspective this appears to be a reasonable time to own Exxon, given that it’s likely near the low point in its business cycle.

From a total return perspective, Exxon’s current dividend yield of 3.4% combines with its potential long-term earnings growth rate of 5-7% to equal annual return expectations of around 8-10% over the long run.

Growing production at some of Exxon’s major project sites is supportive of low-single digit production growth over the coming years, and the company’s downstream / chemical businesses should also continue growing. However, the price of oil will be the big wild card determining overall profit growth.