Exxon’s 7% Yield Is A Good Way To Play The Energy Rebound
Energy and the energy complex began to emerge as a rebound story in late 2020. After years of sluggishness the price of oil was creeping higher, the EIA forecast for 2021 prices was bullish, as is the forecast for demand. Add to this the Saudi pledge to curb production and the outlook for a vaccine-led recovery and the bull case or oil and energy stocks only gets stronger. That’s why it’s no surprise to see that Exxon (NYSE:XOM) has been getting upgraded and that its shares prices are moving higher as well.
The Analysts Warm Up To Exxon Mobil
The average rating on Exxon Mobil is still Hold but the sentiment has been improving steadily for the last six months. Over that time the stock has attracted a few more Neutral/Holders and some of the existing fence-sitters have turned bullish. The downside to this part of the story is that the consensus price target has crept lower even while the sentiment improved and shed $5 or about 10% at the same time. That said, there’s been a string of positive notes, upgrades, and price-target increases since the first of the year that suggests this stock should be trading closer to $59 than the current consensus of $49.
The first of the recent string of upgrades comes from Morgan Stanley. The analysts there upped the stock to Overweight from Equal Weight and gave it a price target of $57. What’s more, the stock supplanted Chevron as the firm’s top pick among the integrated energy companies citing the company’s potential for leverage. Exxon Mobil has been cutting back on CAPEX and streamlining operations which, when coupled with rising oil and nat gas prices, will provide a launchpad for earnings.
The most recent upgrade comes from JP Morgan. Analysts at this firm upped the stock to Overweight after having it set at Neutral for over 7 years. According to them Exxon Mobil has pulled back from the brink of dividend cuts citing the company’s fiscal discipline, rising commodity prices, and a consensus estimate for 2021 that is too low even if Brent moves back down to the $50 range.
"Perhaps most importantly," said analyst Phil Gresh, "capital discipline is improving, with the $20B-$25B capex budget a self-imposed step required to preserve the dividend and balance sheet. Putting this all together, we envision a potential upside case where XOM's dividend coverage breakeven approaches $45/bbl Brent and its FCF yield approaches 11.5% at $60/bbl Brent longer term." Brent crude traded above $56 in recent action.
Exxon’s 7% Yield Is Safe Enough
Exxon’s 7% yield is safe enough but it was in question. The company is not expected to produce positive earnings in the 2020 fiscal period and that was cutting into the company’s cash position. Looking forward, the $1.58 in expected EPS for the 2021 period is still only half the company’s expected distribution but there are some mitigating factors.
First, the balance sheet is still in great shape with very low relative debt and a high level of cash. The company can sustain operations, pay the dividend, and service its debt for several years at this pace. Second, if JP Morgan is right and the price of Brent and WTI are already above the company's dividend break-even point coverage is more than sufficient.
The Technical Outlook: Exxon Is In Reversal
Shares of Exxon Mobil have been tracking higher along with oil prices over the past two months. Most recently, the stock broke above resistance at the $45.50 level confirming a reversal. Based on the magnitude of the Head & Shoulders Reversal pattern of $12.50 this stock could easily see prices move up to the $58 level over the coming quarter. The next big catalyst for the stock, other than the analysts, could be earnings which are due out in a couple of weeks. Better than expected earnings and/or outlook will only improve the stock’s attractiveness as a high-yield rebound story for 2021.
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Almost everyone loves a company that pays strong dividends. Who doesn't like receiving a check every quarter for simply owning a stock--especially if that stock is paying you back 4%, 5% or even 10% of its share price in annual income each year?. In a world where 10-year treasuries are yielding just above 2%, it seems hard to go wrong when buying a stock that's yielding significantly above the going rates on fixed-income assets. Unfortunately, the market rarely offers a free lunch.
While high-yield stocks may have a lot of near-term attractiveness, those same high-yields can often signal significant danger ahead. In some cases, it might mean that the company's dividend will stop growing or won't grow as fast as it used to. Worse yet, the company could cut its dividend, reduce the income you receive from owning the stock and drive down the value of the shares that you own.
4%-plus yields might seem like an easy opportunity to boost the investment income you receive, but high-yield stocks can just as often be a track reading to snare unsuspecting investors. It's not always easy to tell the difference though.
This slideshow highlights 10 high-yield dividend stocks that are paying an unsustainably large percentage of their earnings in the form of a dividend. These companies are all paying out more than 100% of their earnings per share in the form of a dividend, a sign that the advertised high-yield probably won't last.
View the "20 High-Yield Dividend Stocks that Could Ruin Your Retirement Portfolio".