Outsized Dividend Supports Exxon

11/16/2015 8:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

It is always dangerous to call a sustained turn in energy stocks. A slowing economy in China still represents a headwind for the group and there are still questions about over supply of energy, cautions Chuck Carlson, editor of DRIP Investor.

Still, the rebound is certainly a welcomed event for yield-hungry investors who may have gotten a bit heavy in the group.

In the Editor’s Model Portfolio, the only energy-related play is Exxon Mobil (XOM).

To be sure, these blue chip shares have been beaten up pretty badly after peaking at around $97 a year ago, so the stock still has plenty of ground to make up.

Recent earnings results have been fairly brutal for Exxon. However, the rebound in the group may mean Wall Street is probably looking past the poor near-term results.

Indeed, the silver lining of weak near-term profits is that the poor results provide easy comparisons for earnings beats in 2016 and the group’s rally may be reflecting a possible earnings recovery next year.

Of course, stabilization in oil prices—certainly not a given—would go a long way toward restoring the bottom line. Some softening in the dollar—also not a given—would be helpful as well.

One appeal of these shares continues to be the outsized dividend yield of 3.6%. Exxon is currently paying an annualized dividend $2.92 per share.

Of course, earnings estimates for energy stocks, given the price volatility of the underlying commodity, can be relatively imprecise.

Still, it seems the company should comfortably cover the dividend with earnings, although I am less inclined to see significant stock buybacks coming from Exxon over the next 12 months given the pressure on profits.

While it is nice to see the rebound in Exxon Mobil stock, I’m not ready to say it’s onward and upward for these shares.

I like the long-term potential of the stock. I think the dividend is safe and will continue to grow, albeit probably at a low single-digit rate over the next 24 months.

I have no problem if investors who are looking to play the energy rebound but want to remain in blue chips take positions at these levels. Still, you might get an even lower price in the next few months to build positions.

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