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Don’t Let Exxon Mobil’s 10% Dividend Tempt You; It’s a Value Trap!

Last Updated September 26, 2020 4:02 PM
Mark Emem
Last Updated September 26, 2020 4:02 PM
  • Mobil’s dividend yield recently hit double-digit levels.
  • The supermajor’s dividend payments are currently debt-financed.
  • The losses and revenue declines are likely to force the oil giant to rethink its dividend policy.

This has been an eventful year for Exxon Mobil. Last month, the oil giant was booted from the Dow index despite being the largest publicly traded U.S. company as recently as 2013.

And now among S&P 500 stocks, the supermajor currently boasts one of the highest dividend yields. That’s nothing to celebrate, though.

As of Friday, Exxon Mobil’s dividend yield stood at slightly over 10%. The current yield of the S&P 500 index is 1.81%. 

At a time when interest rates are near-zero and stock valuations are looking high, the oil giant might seem like an attractive investment.

Here’s why it’s not.

1. Massive Capital Erosion for Holding Exxon Mobil Stock

Before the oil demand destruction brought about by the coronavirus pandemic, Exxon Mobil’s dividend yield averaged below 5%. Yields have surged because Exxon’s stock has plunged.

Year-to-date, Exxon’s stock has lost more than half of its value. Since hitting this year’s high of $71.37 , in early January, the stock closed Friday at $34.64, a 51% drop.

Exxon Mobil
XOM has fallen by over 50% this year, as the coronavirus pandemic wreaked havoc on oil demand. | Source: Yahoo Finance 

In the meantime, Exxon Mobil has maintained its dividend policy. For nearly four decades, the oil major has been growing its dividend payments to shareholders at an average annual rate of 6.2%.

The dividend yield is calculated by dividing the dollar value of payments by the current share price. With that in mind, the dividend yield would have automatically ballooned as the share price tumbled and the payments to shareholders grew.

2. Oil-Industry Prospects Are Dire

Nobody seems to think that the oil industry has a bright future or even a future at all.

Supermajor BP recently stated that the world might have reached “peak oil.”  According to BP, demand for black gold could fall by at least 10% this decade. By 2040, the oil demand could decline by up to 50%.

It’s downhill for the oil industry, according to British oil giant BP. | Source: @aingealll/Twitter 

Besides the demand destruction caused by the coronavirus pandemic, increased climate action will be responsible for the dramatic fall in oil consumption.

Last week, California announced a ban on the sale of new internal combustion engine  (ICE) cars in the state starting in 2015. The Golden State is currently the world’s fifth-largest motor vehicle market.

No new gas-powered vehicles will be sold in California in the next 15 years. | Source: @Gizmodo/Twitter 

Chinese President Xi Jinping also announced that China is aiming for carbon neutrality by 2060 . The world’s second-largest economy expects to hit peak emissions before the end of this decade.

3. Exxon Mobil’s Dividend Policy Is Unsustainable

For a business that has been in the red so far this year, and which is operating in a declining industry, Exxon Mobil’s current dividend policy seems foolish and misguided.

In its second-quarter results released in July, Exxon posted a 53% decline in revenues compared to a similar period a year ago.

The supermajor additionally registered the first back-to-back quarterly loss in more than three decades. Exxon Mobil reported a loss of $1.08 billion  in the second quarter and a $0.61 billion loss in the first quarter.

This was in sharp contrast to the first quarter of 2019 when it recorded a profit of $3.13 billion.

Exxon Mobil
2020 has been Exxon Mobil’s most challenging year in decades with regard to the net income. | Source: Exxon Mobil website 

Despite the revenue declines and losses, Exxon Mobil has so far maintained its dividend policy . The dividend payments will be financed using debt.

Currently, the company’s debt is hovering just below $60 billion. Given the oil industry’s woes, Exxon Mobil will have no option but to revise its dividend policy, sooner or later.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.