Exxon (NYSE:XOM) pays $3.48 per share in dividends to its shareholders. Will the dividend be cut? So far, not. So the dividend yield for XOM stock is 9.8%. This is a rare bargain.
Exxon has made no statement that it is cutting the dividend since the coronavirus pandemic ramped up. In fact, since the price of oil fell out of bed in the past two months, it has not indicated any such cut.
It has been almost two months since Jan. 29 when Exxon last declared a $0.87 per share dividend. Moreover, this is the fourth quarterly dividend for XOM stock at this rate.
Exxon usually increases its quarterly dividend by the fifth quarter. The next quarterly dividend is not likely to be declared until late April or early May.
So if Exxon was going to signal a dividend cut it will happen within the next month or so. So far no bad news.
Exxon Can Afford Its Dividend
Last year, Exxon generated almost $30 billion ($29.7 b) in free cash flow from operations (CFFO) before its capex spending. Since then the price of oil and gas has fallen at least 35 to 40% on average. So we can assume that going forward the CFFO will be at least $18 billion or so.
Here is the thing. The dividend costs about $3.51 billion per quarter or $14 billion per year, and we haven’t figured in the capex spending yet.
Last year, Exxon spent a whopping $24.4 billion on capital expenditures. So, if the dividend and capex spending stay level, the company has to fund $48 billion. But it only produces $18 billion.
At some point, Exxon has to address this shortfall. Maybe it thinks energy prices will rise. Or perhaps it will cut its capex spending drastically. Or lastly, Exxon could potentially handle the shortfall after capex spending with an increase in debt.
Let’s look at these possibilities.
How Much Capex Can Exxon Cut?
A Seeking Alpha author recently wrote an article describing how much capex the company could cut. He points out that in 2014 Exxon cut its capex from $30 billion to $10 to $15 billion a year within two years.
The author feels that Exxon could do the same thing again within a year. He also feels that if the company needed to borrow to handle the transition, it could do so.
He points out that the company has a very high interest coverage ratio. In addition, Exxon was able to borrow $1.25 billion in the commercial paper market with a low 2.4% coupon.
So, theoretically, if CFFO stayed at $18 billion, which is not likely, and the dividend cost $14 billion, this would leave room for only $4 billion in capex. That is too low, and so Exxon would likely borrow $6 billion annually to cover capex spend of $10 billion for the year.
The Bottom Line on XOM Stock
I am the first to point out that an abnormally high dividend yield is often the sign of an impending dividend cut. But in this case, I don’t believe that will happen.
For one, Exxon has stayed mum about a dividend cut. I believe it will likely keep the dividend level, and not raise it at the end of April, as might otherwise be expected.
On the other hand, Exxon clearly has to address the issue of its huge capex spending. This cannot stay the same if the dividend is not going to be cut.
In addition, most of the other major oil producers have already announced operating expense cuts, capex cuts, and buyback eliminations or cuts. Exxon does not have a significant buyback program. I expect that it will address these issues fairly soon.
Until then, I would bet that XOM stock will be a good investment at these prices. It represents a huge bargain with its 9.8% dividend yield.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.