Oil companies used to compete on how much crude they could produce. Now they’re competing on how much cash they can send back to investors. That dynamic could pay off for Exxon Mobil shareholders, argues one analyst who is no longer bearish on the stock.
Truist analyst Neal Dingmann wrote in a report published Thursday that Exxon looks as if it is going to generate more than enough cash to pay off debt and still have enough to raise its dividend and buyback. He upgraded his rating to Hold from Sell, with a $65 price target. Shares were up 1.3% on Thursday, to $67.62.
The idea that Exxon could raise its dividend had seemed unthinkable just a year ago, because the company looked as if it might have to cut the payout. Exxon had loaded up on so much debt in 2020 to get through the pandemic that it had few options left should oil prices turn south again. Luckily for Exxon, oil prices kept rising, gaining more than 50% in 2021.
The company also cut costs in several areas, and reduced its expectations for capital spending through 2027. The result is that Exxon was able to raise its dividend last year, keeping it on the list of Dividend Aristocrats. The stock’s dividend yield is now 5.2%.
But Dingmann thinks that the company could boost it even more, as it strives to keep up with other oil companies. Exxon’s payout is still larger than most Big Oil peers, besting Chevron
‘s (CVX) 4.4% yield and BP
‘s (BP) 4.6%.
Those aren’t the only oil companies that Exxon must compete against, however. Independent producers are raising their dividends, and several have instituted a new variable dividend policy, which will pay out more of their cash flow to investors as long as oil prices stay high and debt stays manageable. Some of those companies, like Devon Energy (DVN), could even offer investors double-digit yields in the quarters ahead, analysts project.
Dingmann thinks Exxon’s board, which now includes several new directors, could be compelled to keep up, potentially leading to a stronger dividend and more buybacks.
If oil prices stay high, “we would not be surprised to see the more actively engaged management team and board restructure its shareholder return targets in order to compete with its higher yielding sector companions,” he wrote.
Write to Avi Salzman at [email protected]
