Exxon Mobil (NYSE:XOM) has many trappings that can lure unwitting investors, but even with just brief examination, it’s clear XOM stock can lead market participants to a lot of heartache.
Exxon was once the largest domestic oil company by market value and a member of the venerable Dow Jones Industrial Average. Those factoids are no longer applicable as Exxon was booted from the Dow earlier this year and Chevron (NYSE:CVX) took the crown as biggest U.S. oil producer.
Market cap crowns and membership in prestigious indexes are nice, but not necessarily vital to an investment thesis. What is relevant with Exxon are the myriad ways it can entice investors into what’s mostly a value trap at this point. Fortunately, these potholes are easy to spot.
Start with the fact that the stock is down 46.40% year-to-date through Nov. 19, but higher by 12.79% over the prior month. A rally like that can prompt investors to think something more substantial is afoot, but what they should assess are the following factors.
First, if XOM stock is strong, why is it lagging rival Chevron by 800 basis points over the past month?
Second, Exxon would need to nearly double to revisit its 52-week high, an unlikely near- to medium-term prospect given the weak oil demand backdrop created by the novel coronavirus pandemic.
Ignore the Yield on XOM Stock
With interest rates at historic lows and the S&P 500 yielding a paltry 1.74%, it stands to reason that investors will be even more enticed by high dividend stocks than they usually are and with a dividend yield of 9.30%, Exxon is certainly tempting on that basis.
However, if the first half of 2020 – a period marked by rampant payout cuts and suspensions by S&P member firms – taught dividend investors anything it’s that quality, not yield is the name of the game with dividends. No, Exxon doesn’t qualify as a highly-rated dividend stock.
Beyond the obvious of yields rising because the underlying stock price declines, high dividend companies usually get that way because they are financially strained and market participants are growing skittish that the dividend will be cut to conserve cash.
Here’s where investors need to dive deeper with Exxon. The company is prioritizing its dividend, though its multi-year payout increase streak will end this year, leading to the stock’s removal from dividend aristocrats indexes. On the surface, it sounds great that the oil giant is so stridently defending its $3.48 per share annual payout, but it’s actually not good news for investors.
In a note out earlier this month, John Gerdes, a managing director at MKM Partners, says Exxon might need to sell as much as $8 billion in debt to fund its 2021 payout. That would increase the company’s debt burden by 12%. It’s one thing if a low/no debt company sells bonds to fund shareholder rewards, but it’s different, more troubling matter altogether when a company with $69.52 billion in total liabilities, as is the case with Exxon, goes this direction in the name of its dividend.
Another Scary Problem
I recently read an interesting article about “zombie companies” and I suggest anyone mulling XOM stock do the same because, well, the oil producer is considered one of these firms. The simple definition of a company with this ominous label is one where its debt interest expense is more than its earnings.
Think about that a for moment. Exxon’s debt interest outpaces its profits and the company is defending its dividend, opting for asset sales and a 15% reduction in global staff to raise cash.
Those are not hallmarks of a tenable long-term dividend nor are those traits hallmarks of quality companies. Investors should simply pass on XOM stock.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.