Exxon Mobil (XOM): Cheap energy stock

With a market cap of over $360 billion, Exxon Mobil (XOM) isn’t just one of the largest companies in the energy industry, it’s one of the largest companies in the world. That size gives the company more flexibility during industry downturns because it can use its significant cash hoard and borrowing ability to maintain operations until prices rise again, and even make opportunistic investments at low prices.

And, crucially to income investors, the company can also ensure common stock dividends are protected.

Exxon has paid dividends for more than three decades, and increased the dividend every year since 1983, including last year.

The year wasn’t without its challenges, of course. Free cash flow fell from over $24 billion in 2011 to a mere $3.8 billion last year, and is expected to fall to $600 million in 2016. At these levels, free cash flow per share doesn’t cover Exxon’s annual dividend payments, and the company’s payout ratio crept above 100% in 2016. But management drew on the company’s significant cash reserves ($3.7 billion at the end of 2015) and borrowing ability to maintain dividend payments, even delivering an annual increase on time last spring.

In the meantime, the company’s stock has been in purgatory, chopping around between 70 and 95. The stagnation in the share price has caused XOM’s book value per share to climb from $33 to $41 over five years. The stock’s current P/E is still high, at 41, but its forward P/E is close to half that, at 21, reflecting the significant earnings rebound expected in 2017. Revenues are expected to rise 34% next year, supporting a 90% increase in earnings per share. And estimates are rising—four analysts have increased their 2017 estimates over the past month.

Even after the Trump rally, this earnings growth is still far from priced into XOM shares. And at today’s prices, the stock’s very safe dividend yields 3.4%.

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Exxon Mobil (XOM): Headed for another pullback?

By Chloe Lutts Jensen, Chief Analyst, Cabot Dividend Investor
From Cabot Wealth Advisory 8/1/16 Sign up for Cabot Wealth Advisory—it’s free!

Exxon Mobil (XOM)
stock was 30% off its 2014 highs north of 100 before this year’s oil rally began. But after a few months of improving oil prices, XOM had made up nearly all of those gains. In June, Morgan Stanley upped their price target for XOM to 95, and the stock hit that target one month later.

Today, Exxon Mobil stock is back below 90, and headlines like the one above have replaced analyst upgrades.

So are we at an inflection point in sentiment, when investors have become as negative as possible and there’s nowhere for prices to go but up?

Or are we in the middle of a long-term downtrend in oil, which will continue far longer than anyone expects?

Only time will tell, but, given that most of today’s oil bears were oil bulls only six weeks ago, I think I’ll stick with my original “prediction” for now: “Oil Prices Will Stay Low.”

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