After taking a heavy blow during the global pandemic last year, Exxon Mobil (NYSE:) is now showing some strength.
The largest US producer posted its highest gains in recent years last month when it reported that it was amid rising commodity and chemical prices.
The Irving, Texas-based energy supermajor posted adjusted earnings of $1.10 per share in the second quarter, its best performance in more than two years. Chemical gains were the highest ever.
This turnaround makes Exxon's 6% dividend yield more attractive to income investors looking to add a quality dividend stock to their income portfolios. But before making a purchase decision, it's important to understand that Exxon has changed a lot in the past two years. And the current focus is not returning more money to investors.
After a damaging two-year spell during the global health crisis that sapped oil and gas demand, Exxon is in a weakened position. During that period, the company burned nearly $28 billion in cash, borrowed heavily to fund its third-largest dividend, and endured the pandemic-driven shutdown of economies around the world.
To deal with this crisis, Exxon has slashed its capital expenditures and laid off 14,000 employees. As if those shocks weren't enough, Chairman and Chief Executive Officer Darren Woods also lost a proxy battle against activist investor Engine No. 1. Exxon was forced to replace a quarter of its board with candidates promising to improve the company's financial returns and climate strategy.
Balance repair
After all those losses, Exxon is now more focused on restoring its balance sheet before considering raising its quarterly dividend of $0.87 per share. The company's net debt rose about 40% to a record $68 billion in 2020.
That said, the 6% dividend yield looks much safer than a year ago, when demand for oil was low and the company's cash flows were not sufficient to cover the payouts. In its latest earnings report, the company said it generated $9.7 billion in cash flow from operations, which was enough to cover dividends, capital expenditures and debt reduction.
In addition, the company's chemical activities are thriving. Demand for chemicals in general has remained stable despite the slowdown in economic activity worldwide. According to a report by Citigroup
demand for polyethylene, one of Exxon's key chemicals, is "incredibly resilient during the COVID-19 pandemic, despite having some historical correlation with overall GDP."
Encouraged by this strength, Bank of America reiterated Exxon as a top pick. A recent note said:
"We continue to believe that XOM will differentiate itself by recovering with excessive free cash flow to support a resumption of dividend growth that we expect before the end of the year."
Bottom Line
Exxon's 6% dividend yield relies on many risks associated with XOM stocks, including volatile energy markets, the involvement of an activist investor, and the burgeoning Delta variant.
Despite all those risks, Exxon's dividend is much safer than it was last year. With 13 times future 12-month earnings, Exxon shares, which closed at $54.39 Wednesday, may be a steal compared to the 10-year average.
