One of the best ways to generate passive income is by investing in dividend-paying companies. However, investors should realize that, unlike bonds, dividend payouts are not guaranteed. So, in case a company is impacted by macro-economic forces or lower than expected demand that impacts its revenue and bottom-line, the first thing it does is cut or suspend dividend payments.
A few warning signs investors can look for are a high payout ratio or even a high dividend yield. In case such a company is part of an industry that is under the pump or faces multiple headwinds, it is advisable to stay away from the stock until normalcy returns.
One such industry that has been hurt due to COVID-19 is the energy sector and one stock part of this sector that has a high yield is Exxon Mobil (NYSE: XOM). Let’s see if Exxon Mobil stock should be part of your dividend portfolio.
Exxon Mobil is a heavyweight
Valued at a market cap of $266 billion and an enterprise value of $331 billion, Exxon Mobil is one of the largest energy companies in the world. It explores and produces crude oil and natural gas in the U.S. as well as overseas. The company is well-diversified and integrated as it operates through upstream, downstream, and chemical business segments.
It is also involved in the manufacture, trade, transport, and sale of crude oil, natural gas, petroleum products, petrochemicals as well as other specialty products. Further, Exxon Mobil manufactures and sells petrochemical products such as olefins, polyolefins, aromatics, and others. Exxon Mobil ended 2020 with 22,239 net-operated wells.
XOM reports solid Q1 earnings
In the first quarter of 2021, Exxon Mobil reported revenue of $59.15 billion which was a year-over-year growth of 5%. It produced 3.8 million oil-equivalent barrels per day which were 3% higher on a sequential basis, but 6% lower than the prior-year period. Its net earnings stood at $2.76 billion or $0.65 per share indicating year-over-year growth of 21%.
Exxon Mobil beat Wall Street’s revenue estimates of $54.6 billion and earnings forecast of $0.59 in Q1 of 2021. It's an indicator that the global economy is recovering as lockdown restrictions are slowly being lifted. This has increased demand for oil and the prices of Brent crude are up over 30% in 2021.
During its Q1 results, Exxon Mobil CEO Darren Woods said the company has focused on lowering costs while prioritizing capital investments with a “low cost of supply”.
Is XOM stock a good long-term bet?
One of the biggest risks facing energy companies including Exxon Mobil is the global shift towards clean energy solutions that are expected to accelerate in the upcoming decade and beyond. There is a good chance that the demand for oil and natural gas will slump significantly leaving Exxon Mobil and peers with a portfolio of capital-intensive assets that have little value.
Further, oil companies also have huge debts and need to be consistently profitable in order to have a good credit rating. But Exxon Mobil’s cash flow from operations fell over 50% to $15.7 billion in 2020. Comparatively, its CAPEX stood at $21 billion while it also paid close to $15 billion in dividends last year. This meant, Exxon had to increase the debt by 44% in order to sustain dividends making investors wary of its high leverage ratios.
Exxon is hardly immune to commodity prices as seen in the last 12-months which means it has very little control over top-line growth.
The verdict for Exxon Mobil stock
Exxon stock has a forward yield of over 5.5%. While the energy sector is expected to remain volatile, Exxon Mobile has maintained its payout during the toughest of times. The stock might look attractive to contrarian and income investors but the oil industry does not inspire much confidence right now.
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