Oil Prices and ExxonMobil's (XOM) Dividend

Author: Sean Riskowitz on May 1, 2010

Oil giant ExxonMobil (XOM) is the world’s largest company by market capitalization. At a market value of $320 billion, this behemoth is just about larger than Wal-Mart (WMT) and Coca-Cola (KO) combined.
The company is currently yielding 2.56% in dividends, placing it within the top 50% of Dow dividend payers.
In case you didn’t know, Exxon Mobil (XOM) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. The Company has several divisions and hundreds of affiliates with names that include ExxonMobil, Exxon, Esso or Mobil. Divisions and affiliated companies of ExxonMobil operate or market products in the United States and other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products.
The company is one of several direct descendants of John D. Rockefeller's Standard Oil Company (I highly recommend Titan: The Life of John D. Rockefeller), after it was broken up by the authorities. In 1999, Exxon merged with Mobil to form the current entity. According to Wikipedia, “ExxonMobil (XOM) is the largest of the six oil super majors with daily production of 3.921 million BOE (barrels of oil equivalent). In 2008, this was approximately 3% of world production, which is less than several of the largest state-owned petroleum companies”.
In 2009, Exxon (XOM) paid out a dividend of $1.66, which was paid quarterly in equal installments of $0.42. ExxonMobil's (XOM) dividend payments to shareholders have grown at an average annual rate of 5.7% over the last 27 years. To put that in perspective, a $100 investment in the dividend over the same time period would yield current dividends of $446 (growth of 346%, in total).
ExxonMobil also has no problem generating cash from operations. During 2009, the company produced $28 billion in cash, and $59 billion the year before. If you’re worried about falling oil prices and the effects this might have on the company, perhaps it’s worth consulting 2005, when oil prices hit $40 a barrel. That year, Exxon produced $36 billion in profits, $48 billion in cash from operations, and paid out a total dividend of over $7 billion.
Going forward the oil price is likely to rise albeit not at the levels seen in 2008. Growing demand from China, which uses just 10% of the world’s oil despite being the world’s largest car market (and using 40% of world seaborne iron ore and steel), is probable along with further demand from other emerging economies. The supply picture is also fairly tight, with relatively few new major oil discoveries and curtailed production from the OPEC nations.
Whatever the price of oil, ExxonMobil is a massive company with so many operations and so much cash that sustainable long-term dividends are almost a guarantee. The only concern any dividend-seeking investor needs to think about is whether or not the yield, at just 2.56%, is high enough.
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