The energy sector is chock-full of high-yield companies with inconsistent payouts or track records of slashing dividends during industrywide downturns. ExxonMobil(NYSE: XOM) is an exception.
The largest U.S.-based oil and gas major by market cap just raised its dividend for the 42nd consecutive year to $0.99 per share per quarter. Investing $6,000 in Exxon stock should generate over $200 in passive income per year and likely more over time if Exxon keeps boosting its payout.
Down less than 5% from its all-time high, here's why Exxon stands out as a top dividend stock to buy now.
Image source: Getty Images.
ExxonMobil is at the top of its game
Exxon achieved blowout third-quarter 2024 results, including its highest liquids (oil, natural gas liquids, etc.) production in over 40 years. Higher production came from further developments offshore from Guyana and ExxonMobil's acquisition of Pioneer Natural Resources (Pioneer), which has expanded Exxon's already lucrative Permian Basin portfolio. Year to date, Exxon has generated $18.89 billion in earnings and $26.35 billion in free cash flow (FCF) and has averaged 4.23 million barrels of oil equivalent per day (boe/d) compared to $17.16 billion in earnings, $28.13 billion in FCF, and 3.71 million boe/d for the first three quarters of 2023.
The Pioneer acquisition is helping to offset the impact of lower oil and gas prices. However, Exxon has also cut costs and centered investments around quality rather than quantity. More than half of production now comes from "advantaged assets" -- namely, higher-margin production areas offshore Guyana and the Permian Basin. Exxon has achieved $11.3 billion in structural cost savings since 2019, including $600 million in the recent quarter and $1.6 billion year to date. In the third-quarter press release, Exxon said it is on track to deliver cumulative savings totaling $15 billion through the end of 2027 versus 2019.
Exxon is on track to deliver on the goals laid out in its December 2023 corporate plan. ExxonMobil laid out several short-term and medium-term targets -- including $15 billion in cost savings through 2027, $23 to $25 billion in 2024 capital expenditures (capex), with more than 90% of planned upstream capital investments over the next five years expected to generate 10% or higher returns even at Brent crude oil prices of $35 per barrel. For context, Brent prices are around $75 at the time of this writing.
The following chart shows ExxonMobil's capex and the spot price of Brent Crude Oil.
XOM Capital Expenditures (TTM) data by YCharts
Notice that capex tends to peak right before declining oil prices, then reaccelerate once oil prices increase again. So, historically, Exxon's plan to continue ramping capex would be concerning. However, Exxon has a far more efficient and high-quality production portfolio today than in past years. And it is staying disciplined with the way it allocates capital.
Exxon has a rock-solid balance sheet
Exxon finished the quarter with $26.93 billion in cash and cash equivalents, $36.92 billion in long-term debt, and $42.6 billion in total debt -- giving it a net debt of just $15.67 billion. Exxon's net-debt-to-capital ratio, which is net debt divided by total stockholder's equity plus net debt, is now just 5% -- giving the company a healthy capital structure that doesn't rely on debt.
Exxon's efficient use of capital, high-margin asset base, reasonable spending plans, and strong balance sheet pave the way for record capital returns to shareholders. Exxon is on track for a stagging $19 billion in buybacks this year and around $16.5 billion in dividend payments -- bringing its total capital return program to $35.5 billion. With a yield of 3.3%, Exxon offers considerably more passive income than an S&P 500 index fund, which yields around 1.3%.
ExxonMobil remains a balanced buy
Even at mediocre oil prices, Exxon is generating plenty of FCF to make long-term investments in oil, gas, and low-carbon efforts, such as carbon capture and storage, while also returning a ton of money to shareholders through buybacks and dividends.
Exxon's buyback budget is an excellent way to gauge how much wiggle room the company has. With $19 billion in buybacks planned for 2024, Exxon is telling investors how much money it doesn't need to run the business, invest in long-term growth, or pay dividends. If oil prices really tank, Exxon can simply pause buybacks without damaging its dividend track record or its business developments. It's a luxury that results from Exxon's diversified business model, structural cost reductions, efficient asset base, and technological improvements in oil and gas production.
All told, ExxonMobil is at the top of its game and has set clear targets for which investors can hold it accountable. On Dec. 11, Exxon will host a virtual event, which investors may want to tune into to see how the company updates its corporate plan and medium-term targets.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
