What do all of the following have in common? The laptop that I’m typing on right now. The clothes that I’m wearing. The energy that’s powering my home. Like it or not, all of these things are made possible by fossil fuel products. Simply put, energy is the backbone of the global economy. The oil and gas giant, Exxon Mobil ($XOM), plays a crucial role in powering our modern standard of living. That’s precisely what allowed it to hike its quarterly dividend per share by 4.2% to $0.99, marking the 42nd consecutive year that it has done so—earning its place as a Dividend Aristocrat.
After reviewing Exxon Mobil’s most recent earnings results, I believe that the energy titan is an interesting pick for reliable income. Briefly, this is because of the company’s efforts to boost production and also decrease its overall costs. Exxon Mobil’s remarkably strong balance sheet is another positive factor. Finally, the stock’s valuation is the deciding element in my decision to start coverage with a Buy rating.
Exxon Mobil Posted Strong Q3 Results
On November 1st, Exxon Mobil shared what I thought was a respectable third-quarter earnings report. The company’s total revenue decreased by 0.8% year-over-year to $90 billion during the quarter. For perspective, that was $1.7 billion above the analyst consensus for the quarter. The company’s 24% rise in production to 4.6 million oil-equivalent barrels per day from the Pioneer acquisition completed in May was offset by lower commodity prices in the quarter. Exxon Mobil’s non-GAAP EPS fell by 10.3% over the year-ago period to $1.92 during the quarter. That topped the analyst consensus for the quarter by $0.05. This was driven by a drop-off in industry refining margins and the dip in commodity prices.
Cost Savings Efforts Are Fueling Growth for Exxon Mobil
Exxon Mobil looks poised to keep putting up excellent results beyond the third quarter, which is another reason for my bullish stance. Thanks to its commitment to capex over the years, the company’s Upstream segment logged the highest liquids production in over 40 years in the third quarter. Better yet, Exxon Mobil’s Upstream unit earnings have doubled from $5 a barrel in 2019 to $10 a barrel so far in 2024. On this front, the company anticipates that this can improve further to $13 by 2027. This is because Exxon Mobil is leaning more toward advantaged assets (low-cost production) and divesting itself of disadvantaged assets (higher-cost production).
On the Downstream side of the business, Exxon Mobil continues to take steps to lower costs. Since CEO Darren Woods took over in 2017, the company has gone from 22 refineries to expecting to end 2024 with 15 refineries. The idea is that leaning into the most advantaged refineries can boost productivity (e.g., refining volume) and lessen the costs associated with a refining network. This is part of Exxon Mobil’s plans to generate an additional $5 billion in company-wide cost savings from 2023 through 2027. That’s why the analyst consensus is that non-GAAP EPS will rise by 4.8% in 2025 to $8.25. As Pioneer is fully integrated into the company’s operations and more cost savings are delivered, another 19.8% jump in non-GAAP EPS to $9.88 is expected for 2026.
Exxon Mobil Delivers a Safe Dividend with a Strong Balance Sheet
Exxon Mobil’s 3.2% dividend yield registers more than 200 basis points above the 1.2% yield of the S&P 500 index ($SPX). This superior starting income is just the start of the oil and gas juggernaut’s dividend appeal. As noted at the outset, Exxon Mobil has upped its dividend for the past 42 years. The company’s operating efficiency has allowed it to up the payout through multiple bear markets in energy, a handful of recessions, several wars, and a global pandemic. Exxon Mobil’s dividend should keep growing, too. That’s because the company is forecasted to generate $7.39 in free cash flow per share in 2025. Against its slated dividend obligation, this would be a free cash flow payout ratio in the mid-50% range. Keep in mind, that this is after taking the growth needs of the business into account (i.e., capex spending).
Exxon Mobil’s immensely vigorous financial health is another element that can back up the payout. This is because the company’s net debt-to-capital ratio was just 5% as of September 30th. That suggests the balance sheet is well-capitalized. As further proof of its financial vigor, the company’s interest coverage ratio through the first nine months of 2024 was 55.9. For these reasons, Exxon Mobil possesses an AA- credit rating from S&P Global ($SPGI) on a stable outlook. That is important because it helps the company to borrow at low costs and produce strong returns on capital invested.
The Stock’s Valuation Is Buyable
Exxon Mobil’s valuation further adds to my buy case. Shares are trading at a forward P/E ratio of 14.3, which is below the 10-year average P/E ratio of 17.2. On paper, that doesn’t seem like a great bargain. However, it’s important to remember that cyclical companies like Exxon Mobil don’t appear to be deeply undervalued when they are near an earnings trough as the oil supermajor is right now. Coming out of this trough could lead to an upside from here, which is why I’m bullish on the stock.
What Is Wall Street’s Take?
Shifting to Wall Street, analysts have a Moderate Buy consensus on Exxon Mobil. Out of 20 analysts, 12 have assigned Buy ratings, seven have issued Hold Ratings, and one has assigned a Sell rating in the past three months. The average 12-month price target of $131.20 suggests a 9% upside from the current share price.
Investment Summary
As long as the world needs energy, Exxon Mobil looks like an intriguing option for consistently rising passive income. The company’s moves to further optimize its production and efficiency should bode well for earnings throughout a full commodity cycle. The reasonable valuation is what seals the deal for me to issue a Buy rating.
