With a dividend yield that’s nearly twice as high as the S&P 500”²s and a valuation that is hitting multiyear lows, Wall Street analysts finally believe shares in ExxonMobil (XOM, Financial) are turning a corner.
According to Barclays, Exxon’s relative yield to the S&P 500 has jumped to a high of 180% compared to the 25-year average of 140%. Historically, when Exxon's relative yield exceeds 170%, it outperforms the S&P 500 over the next 12 months by an average of 6.8%.
“We think the energy shares may have already reached their near-term lows or at least very close to their lows. We think that the group is currently priced in a long-term commodity price assumption of roughly $60-$65 Brent and $55-$60 WTI.” –Barclays
Right now, the consensus view seems to be that there is no rush to buy shares like Exxon because commodity prices will be lower for longer. Demand is being dampened by slowing economic growth in China and much of the rest of the formerly commodity-hungry developing world.
Many analysts believe the market has finally turned too bearish.
“Investors finally appear to be capitulating on energy for the first time since energy prices started falling. Investors had been trying to time a bottom and found themselves riding a steep downward slope. The recent selloff could be a sign that a bottom is near.” – Wells Fargo Securities
“Now is the bottom of the commodity cycle. Nearly every central bank in the world is stimulating and trying to create inflation. That suggests it’s time to be a buyer of the asset class and not a seller.” – CEO of Advisors Asset Management
There are a few factors that bode in their favor:
- U.S. oil production is set to decline after a multiyear rise due to the shale boom.
- Estimates show that most oil production isn’t profitable at current prices.
- Global oil demand is rising due to lower prices.
Valuation is undemanding
Right now, Exxon’s valuation appears very undemanding. Usuing GuruFocus’ Reverse DCF Tool, we can estimate that investors are only pricing around 2% of annual EPS growth over the next 10 years. This is less than half of the company’s five- and 10-year averages.
Long-term focused dividend investors should definitely take a look at Exxon shares. Depressed oil prices would likely need to persist another 6-8+ quarters before the dividend is truly at risk. The company’s diversified revenue streams are also counter-cyclical, meaning the company can still generate profits even with lower oil prices.
For example, earnings in its downstream business nearly doubled in the first half of 2015 from a year earlier.
There is also no reason to believe that Exxon’s capital discipline, quality assets, scale and integrated portfolio will change in the near future. The company has always shown a superior ability of generating high returns for shareholders regardless of the business cycle.
Conclusion
Analysts are probably right about Exxon shares being a bargain. The company offers one of the safest dividends in the energy sector. Its dividend and share repurchase levels should be maintained for the next few years regardless of low oil prices.
For a reliable dividend payer with an opportunity to outperform the market overall, XOM shares look attractive.
