Is Exxon’s 8% Dividend A Buy Now?
Back in early October I showed you 1 Reason To Avoid Exxon Mobil Stock to protect your retirement portfolio.
Today, I want to give you an update on them and answer – Is Exxon’s 8% Dividend A Buy Now?
You can read the past article in full by using the link above…
But if you don’t want to; here’s a quick recap of what I said back then about avoiding it before we get to today’s update.
1 Reason To Avoid Exxon
- The Extreme Drop In Revenue, Profits, and Cash Flows In The Last 10 Years
Exxon is one of eight oil “supermajors” in the world.
And like the other oil majors it’s a dying breed due to the rapid adoption of renewable energies.
In the last decade Exxon’s revenue fell 42.8% from $372.5 billion in 2010 to $213.9 billion in the trailing twelve months (TTM) period.
Its operating income fell 90.1% from $42.5 billion in 2010 to $4.2 billion in the TTM period.
Its operating profit margin fell from 11.4% in 2010 to 2% in the TTM period.
Its earnings per share fell 73% from $6.22 in 2010 to $1.68 per share in the TTM period.
And its free cash flow production dropped from $21.5 billion in 2010 to negative $1.7 billion and unprofitability in the TTM period.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
These are drastic falls in only 10 years. And it’s going to continue…
Renewable energies aren’t just some pipe dream anymore.
Costs have fallen so much that renewable energy adoption is accelerating.
- Solar prices fell 90% from 2009 to 2020.
- And wind turbine prices fell by 55-60% since 2010.
And these prices are only going to continue falling…
This has led to renewable energy generating an estimated 17% of all power in the United States at the end of 2020.
Which is up from 10% in 2007.
Combine this with more people wanting to take better care of the planet, and oil usage for energy production is on its way to extinction.
I don’t know if this will happen in the mainstream in the next year, the next 5 years, the next 20 years, or sometime in between… But it’s inevitable.
And it’s already crushed Exxon’s revenue, profits, and cash flows while we’re still in the beginning stages of this renewable energy adoption.
Its share price in the last decade reflects these falls too…
From January 2010 to today in late September 2020 its share price is down 54.3%.
Oil’s decline will continue.
And with it, so will Exxon’s revenues, profits, cash flows, and the price of its shares.
Yes, Exxon and the other oil supermajors are investing in renewable technologies… And yes, they may be able to transition well.
At this point that hasn’t happened though.
And I don’t base my recommendations based on what could or might happen… But what is happening now.
Because of these falls, Exxon will have to cut its dividend payout at some point too.
And when it cuts its dividend it will remove one of the major reasons people still own Exxon stock… Its large dividend.
For the reasons of enormous decline in the last decade – and its inevitable continued decline – I recommend you avoid investing in Exxon Mobil. Even though it pays you a 10.2% dividend.
This thesis to avoid Exxon stock continued to play out since I last wrote you about it back in early October…
It released updated earnings on October 30th, 2020 that showed large continued declines in its business.
- Net income fell to negative $680 million in the third quarter of 2020 from positive $3.2 billion in the 3rd quarter of 2019.
- And net income for the first 9 months of 2020 fell to negative $2.4 billion from positive $8.7 billion in the same period of 2019.
This due largely to revenues cratering…
- Revenues fell 28.9% in the year-to-year quarterly period to $46.2 billion in the 3rd quarter of 2020 from $65 billion in the 3rd quarter of 2019.
- And in the first 9 months of 2020 revenues fell 31.7% to $135 billion from $197.8 billion in the first 9 months of 2019.
Even worse, these drastic falls in revenue and net income led Exxon to not raise its dividend in a full year for the first time since 1982.
The last time there was a major oversupply of oil in the markets.
Which is like the problem we’re seeing today…
Far too much oil supply after the huge increase from the United States and its improvements in fracking in recent years.
Combined with the drastic fall in demand due to the coronavirus.
This is leading to a massive oversupply in oil now… Which is driving prices down… Which is harming oil companies like Exxon.
And this will continue until we get back to normal.
When could that be?
Airline executives don’t expect air travel – a major user of oil products – to be back to pre Covid levels of travel until at least 2023.
So, it could be a while… If it happens at all.
Because as I mentioned in the last article on Exxon, oil usage is already falling rapidly in the last decade due to the emergence of “clean” energy.
This is all continued horrible news for Exxon.
And it puts the huge dividend at significant risk… Even more so than in early October.
At this point a dividend cut isn’t just probable anymore… Its almost a certainty.
And when Exxon cuts its dividend, that will drop its share price rapidly.
For these reasons – and the ones in the earlier article – I recommend you continue avoid Exxon.
Because oil was already on its way to extinction as a fuel source… And the pandemic is accelerating this.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.