Exxon’s dividend is up to 3.75% and latest quarterly report says dividend is safe even at current oil prices
Update: August 3, 2015. Dividend income investors don’t buy ExxonMobil (XOM) because it pays the highest dividend in the market or in the oil sector. They buy it—and I bought it for my Dividend Income portfolio on May 21, 2015—because it pays a relatively high, safe yield.
How does that trade off look after a truly horrible second quarter earnings report delivered on July 31? Exxon shares fell by 4.6% after the company reported its worst quarterly profit since 2009. Earnings of $4.2 billion, or $1.00 a share, were down 52% from the $8.8 billion or $2.05 a share reported in the second quarter of 2014.
As of the close on Friday, July 31, shares were down almost 13% for 2015 and 17% for the trailing 12 months. Shares were down 9.2% since I added Exxon to my Dividend Income portfolio.
Actually the trade off still looks pretty good. Thanks to that punishing drop in share price Exxon’s dividend yield as climbed to 3.68% from 3.35% at the time of my purchase.
And despite the huge drop in earnings, Exxon doesn’t look to be in any danger of turning cash flow negative or of having to cut its dividend. In fact on July 29, the company voted to maintain its quarterly dividend at 73 cents a share after raising its dividend to that level on February 6 from 69 cents a share. (The record date for Exxon’s most recent dividend payout is August 13.)
That’s because even after seeing earnings cut in half Exxon earned $4.2 billion in the quarter. And the company’s cash flow besides being really hefty shows plenty of room for reductions that don’t touch the dividend.
For example, cash flow, a more important measure than earnings for seeing if a company might need to cut its dividend, came to $8 billion in quarter that ended on March 31. Capital spending came to $6.8 billion. The company used another $1.8 billion to buy back shares and spent almost $3 billion on dividend payouts.
For that quarter Exxon grew cash by a bit less than $600 million.
Can you see how easy it would be to reduce cash outflows in order to preserve the dividend?
How about reducing capital spending? Capital spending was down 12% in the first half of 2015 and was down 16% in the second quarter from the same periods in 2014.
Or how about reducing stock buybacks in the quarter by $500 million from $1 billion?
Exxon’s ability to offset a crushing drop in oil prices with increased earnings from its refinery and distribution business also adds to the safety factor for this stock. What are called downstream earnings—that is earnings from refining oil and then selling it through gas stations–rose to $1.5 billion in the quarter from $831 million. That wasn’t nearly enough to offset the $2 billion decline in earnings from the company’s upstream business—oil production—but it sure doesn’t hurt an oil company to have a sizeable business that makes more money as oil prices fall.
Shares of ExxonMobil fell below $80 a share on Friday, July 31, to their lowest level since 2012. And there’s certainly a good chance that shares will move lower in the current quarter since crude oil prices have moved lower than they were in the second quarter. Supply growth from OPEC and the end (probably) of sanctions against Iran are likely to increase supply in coming months. West Texas Intermediate, down to $47.12 a barrel on July 31, could retest lows from $40 to $45, although analyst projections still see West Texas Intermediate closing the year at $60 a barrel or better.
But at $60 Exxon’s dividend is safe and the company has room to defend the current dividend at $45 as long as the market doesn’t get stuck at that level far into 2016.
Morningstar currently has a one-year target price of $98 on the shares. Standard & Poor’s is projecting $90.
Me? I wouldn’t mind seeing short-term dip that brought the yield up to 4% or more since, as I read Exxon’s cash flow, the company has plenty of powder available the ability its dividend. (On Monday August 3, shares of ExxonMobil fell another 1.45% and the dividend yield climbed to 3.75%)
Not something I’d say about a lot of companies in the oil and gas sector.
The perfect dividend stock is one that pays a high current yield—let’s fantasize and imagine a yield of 5%–and that is also raising its annual dividend payments at a rate that will produce a future yield (on your purchase price) way above that initial 5%.
Such perfection is rare. Most of the time investors have to pick one–either current yield or future yield. And our choice between the two alternatives should be influenced by the state of the financial world. For example, when interest rates and inflation are stable, a current high yield might be preferable because the value of that dividend isn’t being eroded by rising interest rates or inflation. On the other hand, when either interest rates or inflation are headed upwards, a future dividend that was growing at a faster rate than market interest rates or than inflation has extra value since it’s a way that a dividend income stock, in comparison to the fixed payouts from a bond, can, maybe, keep up or surpass interest rates and/or inflation.
On the eve of the first increase in the Fed funds interest benchmark interest rate since 2006, I think the edge goes to dividend stocks showing a strong pattern of strong increases in dividend payouts.
And that’s why the 25% dividend increase voted by Cummins (CMI) on July 14 caught my eye. That increase pushed the current yield to slightly over 3%. (The yield was 3.02% at the close on July 20.) And it promises, if the company continues its recent (nine-years and counting) history of 25% annual dividend increases, to give you a yield of 9.2% on your original purchase price (of $128.97 at the July 20 close) at the end of five years. (By the way, the recently declared quarterly dividend of $0.975 is payable on September 1 to shareholders of record on August 21.
I’m adding shares of Cummins to my Dividend Income Portfolio as of today July 21.
The big question, of course, is whether the company will be able to continue to increase its dividend payout at anything like the recent rate.
On a purely financial basis the odds look good. The payout ratio over the trailing 12 months has climbed to a still reasonable 31.8% from 20.18% in 2012 so the company has room to increase its dividend. (Payout ratios above 70% or so aren’t easily sustainable for a company that is still investing in its business and in developing new products, as Cummins is.) The company isn’t carrying a lot of debt—the debt to equity ratio is a low 22%–so Cummins doesn’t face that drag on its ability to pay a higher dividend.
Cummins’ market, though, does present a challenge right now. In its last quarterly earnings report Cummins guided to a revenue increase of just 2% to 4% for 2015 as weaknesses in the Chinese and Brazilian market for trucks (and thus for the diesel engines that Cummins makes) continue. Heavy and medium truck sales in China are forecast to fall 15% in 2015 and in Brazil by 28%.
But margins are forecast, by Standard & Poor’s, to climb in 2015 and 2016 on continued cost cutting and improvements in capacity utilization. S&P projects operating earnings per share of $9.96 in 2015 and $11.38 in 2016, up from $9.13 in 2014.
The wild card in these projections is the state of the North American market for heavy and medium duty trucks. Some competitors have pointed to their belief that the demand for trucks in that market has hit a cyclical peak. That’s certainly a danger to revenue at Cummins although the company has a history of adding market share when the market slows that reduces the likelihood that any cyclical decline in market-wide sales would take a big bite out of Cummins’ revenue.
Update: General Electric. Shares of General Electric (GE) rocketed higher today, April 10,climbing $2.84, or 11.02%, on news that the company would sell the real estate holdings of its GE Capital unit for $26.5 billion. The company’s board has authorized a new share buyback program of up to $50 billion. If, after this news, anyone still cares about the April 17 release of first quarter earnings, the company confirmed guidance for operating earnings of $1.10 to $1.20 a share for its industrial business.
It’s not like the sale of assets belonging to GE Capital was unexpected. The company has made it clear that it intends to sell assets in its GE Capital unit and to reduce the operation to a financing business that supports the company’s industrial units such as jet engines and railroad locomotives.
But the speed of the move was more aggressive than expected and so was the decision to launch such a huge share repurchase program, partially funded by the asset sale. Most of the moves to shrink GE Capital to data have been much smaller incremental sales, such as the sale of the company’s Australian and New Zealand consumer lending business. The deal announced today includes an agreement with Blackstone Group and Wells Fargo (WFC) that accounts for $23 billion in real estate assets. The remainder, General Electric said today, will come from ongoing talks with other potential buyers.
General Electric has been a member of my Dividend Income portfolio since February 2, 2012. Appreciation to the close on April 10 is 47.6%.
I think General Electric remains a stock to own in your portfolio. The reallocation of capital from the GE Capital unit to the company’s industrial business means a potential doubling of return on investment since the industrial units aren’t subject to the same reserve ratios as the financial business is. (Regulators decided that GE Capital was a systemically important financial company and that upped the capital the unit was required to keep in reserve.)
The question at this point is how to characterize General Electric going forward. I had put the stock in my dividend income portfolio on the strength of a yield above 3% that looked like it was headed higher. Now, the company might be better characterized as investment in share price appreciation and as such maybe I should move it from the dividend portfolio to Jubak’s Picks
I’m going to wait for the conference call after the April 17 earnings report to see what the company says about its dividend policy going forward before I make that decision. I’ll have a new target price after earnings as well.
On May 11 I posted that I would sell Ensco (ESV) out of my Dividend Portfolio on May 12. I’ve been slow in posting the actual sell, however, and the usual recap of my logic. My apologies. Here’s that sell post now. On May 11, the shares closed at $26.13. On May 12, the close and sell price for the shares was $26.79. Today, the shares closed at $25.26. I missed the local high with my May 12 sell by a day. The shares closed at $27.35 on May 13.
The logic of the sell was simple: The rally in the shares of land-based and deep water drillers that went along with the rally in oil prices had gotten ahead of itself. Before a slight retreat on May 11, Ensco had been up 16.6% in the month.
The fundamentals of the deepwater drilling companies look likely to continue to deteriorate into 2016 as oil producers negotiate aggressively to cut their costs and a big back log of new rigs ordered near the market peak is set to hit the water in 2015 and 2016 before the schedule gets much lighter in 2017.
I suggested taking profits here before those fundamentals reasserted themselves in investors thinking.
Ensco’s quarterly earnings report, released on April 30, filled in some of those fundamentals. Ensco shows that 20 rigs (6 floaters and 14 jackups), roughly 30% of the company’s fleet, will roll off contract in 2015. Even if all of those rigs find new work, they’ll find it at lower day rates. Producers are determined to reduce costs by squeezing suppliers so that they can make money at $70 a barrel or lower and don’t need a return to $100 a barrel oil to turn a profit. In addition, drillers face a huge bulge of new construction. Estimates for the sector show 19 new rigs under construction for delivery in 2015 and 14 in 2016 before dropping to 4 in 2017 and 1 in 2018. (These figures don’t include rigs under construction in China.) Some of these will undoubtedly be delayed or even canceled, but their existence will help push down prices. Ensco itself has 3 drill ships and 3 jackup rigs under construction.
Total spend by oil producers on floaters will fall to $34 billion in 2015, down 8% from 2014, according to Credit Suisse with the analyst projections looking for another 10% to 15% drop in 2016 to $30 billion. If that projection turns out of be accurate, then I think we’re looking at capital spending on rigs bottoming in 2016 and a more sustainable rally emerging later in 2015 when that projection gets some confirmation from the data. I’d look to rebuy Ensco on that schedule.
Update January 20: Income investors are intensely watching dividend changes in the energy sector.
Before the plunge in oil prices, energy stocks attracted lots of dividend money because the sector was one of the few places where you could get a 5% return.
Of course, now, plunging oil prices have put those dividends at risk. The damage has been clearest in the oil service sector where SeaDrill (SDRL) cut its dividend completely and where shares of companies such as Ensco (ESV) and Transocean (RIG), now yielding 9.9% and 18.8%, respectively, are trading as if their dividends are in danger. (More on SeaDrill and Ensco in the next few days; both stocks are members of my Dividend Income portfolio http://jubakam.com/portfolios/ )
Is the damage about to expand to take in energy master limited partnerships in pipelines and sand for fracking? So far the evidence says No. But that answer is by no means definitive. What we’ve been seeing over the last few weeks has been limited but significant increases in dividend payouts by the solid companies in this group.
So, for example, on January 15, fracking sand MLP Hi-Crush Partners (HCLP) announced that it would raise its payout by 8% to 67.5 cents a unit from 62.5 cents. (The record date is January 30 and the payment date is February 13.)
I don’t think this means Hi-Crush is out of danger—or that the shares are about to immediately recover to the $65 range of last September from the current $37 a share price on January 21. There is just the little issue of whether the slowdown in drilling activity in the U.S. oil and natural gas shale geologies will cause a bigger than expected drop in sand volumes and prices. We’ll have a better feel for that when Hi-Crush reports earnings and revenue on February 5.
What I really want to know as I prepare to collect another 6.95% payout from Hi-Crush is whether that “impairment” in the share price is temporary or permanent—and how temporary it might be. Hi-Crush is a member of my Dividend Income portfolio.