This opening round features two of the world’s premier oil majors, ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX). These would be the Duke and North Carolina of oil companies, if you will.
Both of these oil majors are All-American dividend payers I’d love to have on my team. ExxonMobil and Chevron have raised their dividends for 32 and 26 consecutive years, respectively, and both sport attractive current yields. At current prices, Exxon pays a dividend of 3.2% and Chevron pays a dividend of 4.1%–close enough to make it a virtual wash.
Let’s take a look at Exxon. This is the largest of the global oil majors: The Frank Kaminsky of energy companies, if you will.
Exxon has taken a beating of late due to the collapsing price of crude oil. Its share price is down about 19% from its highs last year, and for the first time in a long time I can credibly say the stock is cheap. Its dividend yield is the highest it’s been in decades, yet its dividend payout ratio is still very modest 36%.
I realize that the dividend payout ratio will probably spike up in the coming quarters as Exxon’s earnings slow due to the rout in crude oil prices. But coming from such low levels, investors have a wide margin of safety here. And Exxon has a long history of maintaining and even raising its dividend under very difficult conditions in the energy markets. As I wrote late last year, Exxon continued to pay and raise its dividend throughout a 20-year bear market in energy. Dividend growth slowed a little…but surprisingly, not all that much.
It’s easy to keep your payout stable when your balance sheet is as rock-solid as Exxon’s. Its debt-to-equity ratio is a very modest 17%, and Exxon is one of only three companies in America to have its debt rated AAA by Standard & Poor’s. The other two are Microsoft (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ).
Exxon has also managed to maintain impressive profitability for an old-line behemoth from the 19th century. Its return on equity has averaged about 26% over the past 15 years.
Is there anything to worry about here? Well, there is whole “Russia thing.” Despite the confrontation with the West over Ukraine, Exxon continued to invest heavily in Russian drilling rights throughout 2014. It now owns more than four times as much acreage in Russia than it does in the United States. For the foreseeable future, sanctions will prevent Exxon from doing much with those drilling rights, and they won’t do much for earnings. But Exxon appears to be taking the long view, betting that the deep freeze in relations will eventually thaw.
Now, let’s look at the competition. Chevron, like Exxon and the rest of the oil majors, has taken an absolute beating over the past year. Its share price is down about 23% since late July and has underperformed the S&P 500 by nearly 28%.
As a value investor, there is a lot I like here. Chevron is cheaper than ExxonMobil. Its price/earnings and price/book ratios are sitting near multi-year lows at 10.2 and 1.3, respectively, compared to 11.2 and 2.1 for Exxon. This is because Wall Street is a little less than enthusiastic about Chevron’s earning power in a low-crude-price environment, but after the beating the stock price has taken, it would seem that the bad news is mostly priced in.
Chevron’s dividend yield, at 4.1%, also makes it one of the highest yielders in the S&P 500. And Chevron has been a very aggressive dividend raiser over the past decade, growing its dividend at a 10.2% annualized rate compared to Exxon’s 9.6%. To put that in perspective, had you bought Chevron 10 years ago and held until today, your effective dividend yield today on your original cost would be nearly 11%.
Chevron’s dividend payout ratio is a very manageable 42%. Even if Chevron shoots air balls for the next several quarters with new projects, its dividend would seem safe for the foreseeable future. Unfortunately, Chevron recently suspended its share buyback program, which is a letdown but also a completely reasonable defensive move given its difficult operating environment.
Chevron has had a harder time ratcheting down its capital expenditures than some of its Big Oil peers, and this is unfortunately a pretty big deal. Several of Chevron’s big projects—including major liquefied natural gas projects in Angola and Australia and multiple platforms in the Gulf of Mexico—are at stages that require a lot of capital spending that cannot be postponed. That’s going to hurt profitability and may force Chevron to borrow a little more heavily than usual. And it will probably force Chevron to crimp dividend growth going forward. But with a debt-to-equity ratio of just 18%, Chevron has the ability to borrow pretty heavily without putting its long-term future at risk.
So, who is the winner here? I’m going with Exxon. You take a slightly lower dividend today, but in Exxon you have much better potential for dividend growth and continued share repurchases, and the Russian interests can be thought of as something like a call option. If relations continue to deteriorate between Russia and the West, they expire worthless. But if Putin backs down—or is replaced—there is potentially a lot of value there.
Disclosures: Long XOM, MSFT
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