I have never quite figured out how to generate reasonable long-term returns by acquiring shares at lofty valuations. I am of the opinion we will continue to witness a broad market pullback and strongly suspect many investors who were tripping over themselves to acquire shares regardless of valuation (the greater fool theory) will see their investments get hammered.

With the broad investment community appearing to have cast Exxon Mobil Corporation (XOM) into the 'scrap' pile, XOM now appears to be attractively valued for patient long-term investors.

In exchange for investor patience, XOM currently offers an attractive dividend yield. Furthermore, investors can realistically expect a dividend increase to be announced within the next several weeks.

Summary

  • Exxon Mobil released its Q4 and FY2019 results on January 31, 2020 and is scheduled to hold its 2020 Investor Day on March 6, 2020.
  • It appears to be out of favor with the broad investment community which has resulted in shares being attractively valued.
  • The company faces headwinds in the short-term but commodity prices should improve to mid-cycle levels.
  • There are various new projects which should come online over the next 1 -2 years which should improve XOM’s results.
  • XOM’s long-term debt is highly rated by Moody’s and S&P Global.
  • The attractive dividend yield provides investors with some compensation as they await improved results.

Introduction

In several previous articles I have expressed concern that the valuation of many stocks has become detached from the fundamentals of the underlying business. I have also indicated that a broad market pullback was likely to occur at some stage and that I was refraining from deploying most of my capital which I have sitting on the ‘sidelines’. I did not, however, expect the broad market pullback we are currently witnessing to take so long to materialize nor did I ever anticipate the pullback would be triggered by what appears to be a global pandemic (even though the World Health Organization has yet to declare it to be a pandemic).

Despite the current broad market pullback, I am still of the opinion that many companies are still grossly overvalued. I, therefore, continue to hold cash which I will deploy once the companies on my ‘watchlist’ become fairly valued or undervalued.

While my equity purchases have been few and far between in recent months, I decided to acquire additional Exxon Mobil Corporation (XOM) shares today. Although some readers may view an investment in a major integrated oil and gas company as a less than desirable long-term investment, I view my additional XOM investment as being ‘low risk’.

I do not dispute XOM’s industry is experiencing significant headwinds which are unlikely to end anytime soon. I think, however, the world is so heavily dependent on the products produced by the major integrated oil and gas companies and by companies which use materials purchased from them (details on XOM’s upstream, downstream, and chemical business segments can be accessed here). I envision there will continue to be a strong demand for the products produced by the major integrated oil and gas companies for many years to come and that the strongest and most efficient operators will continue to be profitable and to generate strong free cash flow far beyond my lifetime.

Although XOM will be holding its 2020 Investor Day on March 5th at which time senior management will provide guidance to the investment community of its plans to enhance long-term shareholder value (2019 Investor Day presentation – March 6 2019), I am of the opinion XOM is currently attractively valued (I will also be on a ski vacation and monitoring what is happening in the world will not be my priority).

Rather than wait until Investor Day to increase my exposure to XOM, I acquired an additional 400 shares for one of the side accounts within the FFJ Portfolio.

In this article I touch upon my rationale for acquiring additional shares.

FY2019 Results

On January 31, 2010, XOM released Q4 and FY2019 results. Material related to this earnings release can be accessed here.

XOM’s recent earnings releases have reflected softer earnings and cash flow resulting from the macroeconomic headwinds it faces across all parts of its business; in FY2019, XOM reported cash flow from operations and asset sales of $32.5B versus $41.5B in FY2018.

As a result of the difficult macroeconomic environment, earnings have been depressed by weaker commodity prices and lower refining and chemical margins.

XOM continues to target $15B in asset sale proceeds through 2021 however, which should buffer operating cash flow until commodity prices improve to mid-cycle levels and new projects come online.

FY2020 Guidance

Guidance is expected to be provided at XOM’s upcoming 2020 Investor Day.

Credit Ratings

In general, I am risk averse and am even more so given that the coronavirus matter is unlikely to be resolved in short order.

Looking at XOM’s current long-term debt credit ratings I see that in:

  • November 2019, Moody’s reaffirmed XOM’s Aaa long-term debt issuer rating;
  • September 2019, S&P Global reaffirmed an AA+ long-term debt rating; S&P Global’s rating is one notch lower than that accorded by Moody’s.

Both ratings are at the upper end of the credit rating scale which gives me some comfort that XOM is highly unlikely to become insolvent any time soon.

Dividends and Dividend Yield

XOM’s recent dividend history can be accessed here.

XOM’s 4th quarterly $0.87/share dividend will be distributed March 10, 2020. Based on XOM’s recent dividend history and the challenging business conditions, I am conservatively forecasting a $0.04/share/quarter dividend increase come May 2020 versus the $0.05/share/quarter dividend increases evidenced in recent years; I am erring on the side of caution.

Using my projected $0.04/share/quarter increase, the $0.91/share/quarter ($3.64/share/year) would provide investors with an attractive ~6.7% dividend yield based on a ~$54.21 share price.

As a Canadian resident, I will incur a 15% withholding tax on the dividends since the additional shares I have acquired today are held in a non-tax advantaged account. The $3.094/share dividend received annually will provide a dividend yield of ~5.7% on the basis of the current $54.21 share price.

I view this as an attractive dividend yield for what I perceive to be an investment with a relatively low risk of a permanent impairment to my capital.

Valuation

XOM’s PE ratio has been all over the map in 2010 – 2019: 11.76, 10.21, 8.92, 13.21, 11.63, 16.45, 42.18, 27.24, 12.53, and 20.28.

In FY2019, XOM generated $3.36 in diluted EPS. On the basis of the current ~$54.21 share price, we have a PE of ~16.14.

The current mean adjusted EPS from 25 analysts is $3.34. On the share price, we’re looking at a forward adjusted PE of ~16.23.

I recognize XOM faces some headwinds but I view the valuation levels reflected above as being attractive for a company of XOM’s pedigree.

Final Thoughts

With the trend toward ‘clean energy’ I can appreciate that XOM will likely experience more challenging business conditions as time passes. I do not, however, think the total elimination of products produced by XOM is likely to occur during my lifetime. I certainly expect some of the weaker industry participants will fall by the wayside but XOM is one of the world’s largest major integrated oil and gas companies with a market cap in excess of $240B and I expect it will be a long-term industry participant.

I have never quite figured out how to generate attractive long-term investment returns when shares are acquired when valuation levels are elevated…much like what we have witnessed with many companies in recent months. As a result, I have been loath to deploy cash over the past several months to acquire shares of great companies which I deem to be too richly valued.

I the case of XOM, we now have a highly rated large major integrated oil and gas company which has experienced challenges in recent years and it would appear many investors have cast XOM into the ‘scrap’ pile. I am not, however, about to write off XOM.

I currently view shares to be attractively valued and think the attractive dividend yield is adequate compensation for me while I patiently wait for shares to appreciate in value.

My XOM exposure now includes the:

  • 400 shares acquired today;
  • several hundred shares acquired in 2009, 2010, and 2015 (plus the reinvested dividends);
  • shares acquired August 24, 2015 for one of the Core accounts within the FFJ Portfolio.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long XOM.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.