ExxonMobil has continued its streak of hiking its dividend, announcing another increase in its payout to shareholders on Wednesday. The oil major has boosted its dividend every year for more than three decades, but the collapse of oil prices since 2014 has resulted in more scrutiny over the company’s payments to shareholders.
Exxon has defied the oil market downturn, stepping up shareholder payments even though the company has seen its debt pile balloon over the past three years. Exxon is viewed as one of the most rock-solid stocks for investors, and the confidence that shareholders have in the ever-increasing dividend is one of the reasons why.
The dividend is treated as sacred – Exxon, and other oil majors, refused to touch their dividend policies over the past few years even as they made savage cuts elsewhere, slashing new exploration, deferring projects, gutting their payrolls, and selling off assets. They have even taken on more debt in order to avoid having to reduce their dividends, a trend that resulted in Exxon losing its coveted AAA credit rating from S&P a year ago.
However, Exxon has slowed the growth of its dividend. This year and last year the company only boosted the payment by a paltry 2 cents per share, less than half of the typical annual increase in the years before the oil price meltdown in 2014.
According to Bloomberg, Exxon’s payments to shareholders cost the company more than $12.7 billion per year, a staggering sum and a figure that exceeds that of any other S&P 500 company. Related: Space Mining: The Final Frontier For Oil Countries
If oil prices remain as low as they are for the foreseeable future, it could be difficult for Exxon to continue to increase its dividend.
“We think a dividend hike of this magnitude is at risk given the deterioration of underlying cash flows through the industry downturn,” Chris Kettenmann, chief energy strategist at Macro Risk Advisors, wrote in a research note ahead of Exxon’s announcement. “No asymmetric risk looms larger in our view than dividend risk at the global oil majors.”
But ExxonMobil CEO Darren Woods sounded undeterred in a presentation to the New York Stock Exchange in March. Woods said that Exxon is “geared to deliver sustainable, long-term shareholder value,” and he added that “we are committed to paying a reliable and growing dividend over the long term.”
To be sure, the roughly doubling of oil prices from the first quarter of 2016 will likely result in a near doubling of Exxon’s cash flow and net income for the first quarter of this year. Exxon will report its quarterly earnings on Friday, April 28. Meanwhile, all of the oil majors have been able to reduce their operating costs, which should help them survive in this lower oil price environment. Exxon was able to cover its dividend in the fourth quarter with cash flow, although for the full year had negative cash flow after accounting for its shareholder payments.
In fact, Exxon is undoubtedly much better off than some of its peers. Its dividend yield is only at 3.67 percent, compared to the much higher – and arguably, unsustainable – levels at Royal Dutch Shell and BP, which have a 7.13 percent and 6.92 percent dividend yield, respectively. Related: Oil Prices Pull Higher As Refiners Soak Up Soaring Crude Imports
Also, its massive $42.8 billion mountain of debt, as of the end of the fourth quarter, is actually manageable for a company valued at roughly $350 billion. By way of comparison, Chevron has just as much debt but is worth only $200 billion. Meanwhile, Shell has a stratospheric $73 billion in debt.
Still, it is not at all clear that oil prices are heading up, or will even remain steady. Another downturn would ratchet up the pressure on the oil majors, Exxon included. Exxon’s stock is down by nearly 10 percent so far this year.
By Nick Cunningham of Oilprice.com
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