Exxon Mobil (NYSE: XOM) is the sixth-largest publicly traded company by market cap.
That’s certainly impressive. But what’s not so inspiring is its numbers.
Declining oil prices have crushed earnings and cash flows for most oil companies. Exxon Mobil is no different.[ad#Google Adsense 336×280-IA]In fact, things have gotten so rough that the oil giant currently pays out more in dividends than it generates in free cash flow.
And as my boxing trainer said (at least, after he watched me spar for the first time), “That’s not good.”
Cash Flow Forecast
Exxon Mobil is forecast to generate $7.4 billion in free cash flow this year, nearly double last year’s $3.9 billion.
But it’s expected to pay shareholders $12.3 billion in dividends.
While cash flow is moving in the right direction, it’s not enough to cover the dividend this year.
However, if next year’s projections are right, Exxon Mobil will more than double free cash flow to $16.8 billion. That should not only cover the dividend, but also keep the payout ratio right around my 75% threshold, which is great.
A recent dividend elimination plus several years of inadequate cash flow means that BP’s dividend is in worse shape than it was when I analyzed it a year and a half ago. Unless oil prices spike and drive cash flows higher, I’d be worried.
Typically, I look for companies using 75% or less of their free cash flows to pay dividends. That way, if times get tough, these companies should still have enough cash to pay their dividends without having to cut them.
While things are looking better for next year, today’s numbers stink. And they stunk worse last year.
The only thing saving Exxon Mobil from an “F” dividend safety rating is its stellar history of dividend raises.
The company has boosted its dividend every year since 1982.
Back then, Ronald Reagan was just getting comfortable in the Oval Office, and Dallas ruled the television airwaves.
That’s a heck of a track record.
Exxon Mobil’s excellent track record bumps it one notch above SafetyNet Pro’s lowest rating.
If next year’s cash flow increases to the point where it meaningfully exceeds the amount paid in dividends, the stock could get upgraded to a “C.”
But if Exxon Mobil’s cash flow doesn’t reach the projection, management may have to think about the unthinkable – ending the 34-year streak of dividend hikes.
Dividend Safety Rating: D
Source: Wealthy Retirement