Should You Avoid This Oil Giant And Its 6% Dividend?
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
To help you figure out how to protect your retirement portfolio in these uncertain times, today I want to answer – Should You Avoid This Oil Giant And Its 6% Dividend?
Exxon Mobil (XOM) is one of the world’s largest oil and gas explorers, producers, and refiners.
As of the end of 2019 it had the worlds largest refining capacity at 4.8 million barrels of oil per day.
But Exxon’s business is under siege from multiple directions which I will talk more about below.
However, all of this is in the past and the future.
What about Exxon as an investment right now today? Is it a good one? Should you avoid it?
Today, I want to help you figure out whether you should buy it or not for your retirement portfolio.
It’s based in Irving Texas. It has a $247.5 billion market cap. And it pays you a massive 6% dividend. Which is reason #1 to consider buying its stock.
Exxon Mobil’s 6% Dividend
Over the last decade Exxon’s paid out a total of $28.25 per share in dividends.
At today’s share count of 4.271 billion shares that’s equal to $120.66 billion paid out to shareholders in that time.
It also grew its dividend 88.1% from $1.85 per share in 2011 to $3.48 per share now.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns massive profits. At least it used to… Which is reason #2 to consider buying Exxon for your retirement portfolio.
Exxon Used To Earn Massive Profits
Over the last decade it earned an average operating income margin of 4.9% per year.
I look for anything above 10% so this isn’t great.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 3.3% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
Exxon falls short of both metrics which means it’s no longer a world class business operation.
I’ve now mentioned this several times… That it used to be a great business and that its being hit from various angles
Covid crushed oil demand due to the almost complete stoppage of air traffic. This also fell drastically due to people driving their cars less also due to Covid related business, recreation, travel, and work-related closures.
This is a short-term thing that will end at some point.
The bigger issue though is oils long term decline as an energy source – for everything.
No matter what you think of “green” energy like solar, wind, biofuel, etc.… That’s all coming.
Frankly its not only coming… For the most part its already here especially solar.
This is especially important due to the rise of Tesla and other electric vehicle companies that don’t use oil-based products.
And the fact that governments worldwide are pushing for more – or in some cases – all new vehicles sold to be electric by 2040.
This won’t stop. It will only accelerate.
No oil and oil-based products like plastics won’t go away entirely. But oil and gas an energy sources are already on their way to extinction.
And it’s happening rapidly…
As one example… Exxon’s revenue fell 62.1% from $471.1 billion in 2011 to $178.6 billion in 2020.
This is also why its profits have cratered in the last decade as well.
And this will only accelerate.
Because of this, it also has a lot of debt too…
Exxon Has A Huge Amount of Debt
Because of its business model – and the oil industry dying – it has a ton of debt.
As of this writing XOM has $8.83 billion in cash compared to staggering $68.79 billion in debt.
As a percentage of its balance sheet total liabilities make up only 51.8%.
Debt makes up a gigantic 27.8% of its market cap.
And its debt-to-equity ratio is 0.3.
These are all well below the minimum thresholds I look for when considering an investment. And this makes buying Exxon safer to own right now.
Except for one thing… Its absolute dollar amount of debt is huge… Especially combined with the issues its had in the last year due to Covid. And those it will continue to have due to the declining oil industry.
Is its debt a huge issue now compared to its size, no? But it will become an issue the more Exxon’s revenues and profits fall.
What about its valuation?
Is it cheap enough to buy?
Exxon IS NOT Cheap…
With the markets at or near all-time highs you might expect a giant like Exxon to be selling at an enormous valuation.
Unfortunately, it is.
As of this writing its P/E is 58.5.
Its P/CF is 16.9.
Its forward P/E is 18.8.
And its enterprise value to operating income – EV/EBIT is 48.7.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that Exxon is massively overvalued right now.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Exxon being overvalued right now, its stock does not offer you a large margin of safety.
Especially when you consider its huge debt load too.
This means you should avoid its stock due to its valuation, debt levels, and dying oil industry.
If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – Avoid Exxon’s 6% dividend and consider investing in one of the stocks below.
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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.
P.S. Breaking Poll – Do You Plan To Invest More As The Economy Roars Back? Vote Here