On July 22, Goldman Sachs added Exxon Mobil (XOM) to its Conviction Buy list with a $95 price target, citing above average dividend growth, a strong balance sheet and healthy refining margins. Analyst Neil Mehta thinks the company is positioned to outperform the sector and calls the company a "rare dividend/FCF growth story among big oils."
While Exxon’s stock is down nearly 25% over the past 12 months, it has still outperformed similarly sized peers such as Chevron (CVX), BP (BP), and Royal Dutch Shell (RDS.A)(RDS.B). Over the past decade, Exxon shares have returned roughly 35% plus around 3% in annual dividends.
Let’s take a look at some of the factors Goldman Sachs cites.
Healthy and sustainable dividend
Goldman Sachs believes Exxon can raise its dividend, on average, by 6% through 2017 versus zero improvement for ConocoPhillips (COP) and just 1% for Chevron. Exxon’s dividend yield of nearly 3.5% is currently the highest in its history, with the company posting strong dividend growth rates nearly every year over the past decade.
While it is hitting company-specific highs, Exxon’s dividend yield still lags that of nearly every other large competitor. Still, the company has figured out other ways to return cash to shareholders. In the past 10 years alone, Exxon has reduced its share count by over a third, versus negligible buybacks for each of its other competitors. This has allowed it to grow EPS faster than every competitor but Chevron, not to mention share buybacks are more tax-friendly for investors than straight out dividends.
Plus, with a dividend payout ratio that is the lowest in the space, investors can rest easy knowing that there is an extremely small chance of a near or even medium-term cut. Other competitor’s dividends aren’t as reliable given earnings predictions.
Cash flow growth
Goldman Sachs also expects free cash flow will ramp from $9 billion at $57/bbl Brent in 2015 to $19 billion in 2017 at $65/bbl Brent, as capex decreases and volumes improve.
Exxon has always shown a focus on generating cash flow from earnings. While many peers have had periods of negative free cash flow over the previous decade (mostly during the peak of the financial crisis), Exxon has maintained positive levels every year. This has given the company an incredible level of stability in terms of buybacks, dividends and reinvestment opportunities.
With an ability to roll back historically high capex spending, higher free cash flows should continue to allow dividend growth. In addition, it also gives Exxon the firepower necessary to scoop up some struggling rivals while their stocks are at all-time lows. BP for example has been rumored as an acquisition target in recent months. Exxon would be one of the only competitors large enough to digest it.
Higher production volumes
After declining by 4%, on average from 2012-2014, Goldman Sachs expects total E&P volumes will increase by 3%, on average, from 2015-2017 due to several major upstream projects. Following a strong increase in capex spending beginning in 2011 and a large number of new projects that were initiated this year, Exxon finally managed to stem the decline in its oil volumes. In an environment where almost every competitor is rolling back capex at the expense of developing future production volumes, Exxon is in a unique position of being able to cut capex spending while also growing volumes.
Conclusion: Exxon is priced at a rare value
Even at $65 a barrel oil, Exxon is still poised to grow production volumes, roll back expenses, generate high levels of free cash flow, continue share buybacks and grow the historically high dividend. Down 25% in the past 12 months, investors are getting a rare chance to buy Exxon stock at a discount.
For more ideas like this one, check out GuruFocus’ High-Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.
