It looks like the 2022 outperformer Exxon Mobil (NYSE: XOM) stock has reached its happy place, hovering not too far away from its all-time high. The stock gained nearly 80% in 2022 (when including dividends), while the S&P 500 (SPX) lost almost 20% in the same period. This question is likely echoing in investors’ minds now: is there any point in buying the stock at such high levels, or is it time to sell? Looking at the future plans laid down by the company, as well as the large share buybacks, the future looks good for XOM stock.
FY2022: The Best Year Ever for Exxon Mobil
2022 marked the best year ever for Exxon Mobil. Its 2022 profits are expected to cross their all-time highs to around $58 billion. Further, the company generated record free cash flows and decided to reward its investors with growing dividends and share buybacks.
However, on January 4, the company indicated in an SEC filing that its profitability will be negatively impacted by lower oil and gas prices.
Despite the slowdown, the company is expected to report upbeat Q4 earnings. The street estimates XOM to report an adjusted Q4 EPS of $3.29 in Q4 on January 31, implying a year-over-year growth rate of approximately 60%.
Let’s take a deeper look at the long-term growth prospects of Exxon Mobil to derive an investment thesis.
2023 & Beyond: XOM Unveils Five-Year Corporate Plan
In December, ExxonMobil laid out its long-term vision for the next five years. XOM expects its earnings and cash-flow growth to double by 2027 versus the levels seen in 2019. For reference, in FY2019, the company reported adjusted EPS of $3.36 per share, while cash flow from operations stood at $29.7 billion.
The company aims to maintain annual capital expenditures at $20 billion to $25 billion while increasing investments towards lower-emission initiatives by 15% to $17 billion through 2027.
Additionally, the company aims to grow its production by 500,000 oil-equivalent barrels per day to 4.2 million, driven by higher investments in high-return, low-cost projects.
Impressive Dividends and Buybacks Imply Solid Returns Ahead
Concurrent with the firm’s long-term strategic plan, XOM announced a massive hike in its share repurchase plan from $30 billion to $50 billion, effective through 2024. Out of that, $15 billion is expected to have been completed in 2022. That means that the company can buy back $35 billion worth of shares over the next two years. This implies a nice 7.7% return on the current market cap of $455 billion and is very impressive.
On top of that, the company increased its dividend to $0.91 in November. Its current dividend yield is attractive at 3.3%.
Markedly, the company returned approximately $30 billion (6.6% of the current market cap) to investors in 2022 in the form of $15 billion in dividends and another $15 billion in buybacks during 2022.
The share buyback plan comes at a surprising time as the XOM stock is at its all-time high. Usually, company management resorts to share buybacks when they ascertain that the company shares are undervalued and the time is right to repurchase the shares.
Exxon Mobil’s decision to repurchase its stock despite the lofty stock price levels indicates strong management confidence in the future growth prospects of the company. That explains why the elevated stock price didn’t discourage management from executing the buybacks.
The company is sure that buybacks are the best utilization of the record free cash flows generated during FY2022. The cash flows got an extra boost from exorbitant petroleum and natural gas pricing during the year triggered by the Russia-Ukraine crisis.
Is XOM Stock a Buy, Sell, or Hold?
Given the strikingly high stock price levels, analysts are cautiously optimistic about the XOM stock and have a Moderate Buy consensus rating, which is based on nine Buys and six Holds. As per TipRanks, Exxon Mobil’s average price forecast of $119.73 implies a 8.3% upside potential.
Despite its high stock price, XOM stock surprisingly isn’t very expensive in terms of valuation. Currently, it’s trading at an attractive P/E ratio of 8.9x. Further, its current valuation reflects a massive 50% discount from its five-year average of 17x.
Conclusion: XOM Remains Attractive in the Long Term
XOM stock displayed record growth in 2022, driven by record-high oil and gas prices. With the recent cooling of oil prices, it will be too optimistic to expect similar growth in 2023. Nonetheless, I believe the stock has long-term growth potential.
Plus, given the company’s track record, the company should keep rewarding its shareholders via attractive dividends and buybacks. That is further backed by a sturdy balance sheet as well as healthy free-cash-flow generation.
The fears of an impending recession and reduced oil and gas prices may impact profits and cash flows in the near term. Longer term, however, the stock is expected to generate handsome returns for investors.
