Stop by Exxon Mobil (NYSE: XOM), and I’m sure you’ll notice the hike in gas prices.
But soaring prices may not have the desired effect on Exxon’s financial stability…
The company has raised its dividend for 38 consecutive years. It has proven its dedication to its dividend – but its payout is not sustainable.
As you can see in the chart above, in 2019, Exxon Mobil’s free cash flow totaled a meager $5.4 billion. At that time, the price of crude oil hovered around $50 to $62 a barrel.
Cash flow was not nearly enough to cover the company’s $14.65 billion in dividend payments.
Then, crude prices tanked. Exxon’s free cash flow was -$2.6 billion in 2020. Meanwhile, the company paid out $14.9 billion in dividends.
Exxon increased its long-term debt by more than $1.6 billion to pay out this dividend!
The company can’t afford to do this over the long term. As interest rates rise, the company taking on this much debt will become far too expensive.
Now, crude oil prices have recovered to around $60, and Exxon’s free cash flow is projected to be $17.3 billion in 2021.
But it’s still not enough for Exxon to sustain its dividend…
Even if Exxon Mobil is able to meet that $17.3 billion projection, the company will have an 85% payout ratio.
This is well above SafetyNet Pro‘s comfort zone. (As a reminder, we want to see payout ratios of less than 75%.)
The company will need to continue taking on more debt and selling assets to have enough cash on hand to meet dividend needs.
Otherwise, Exxon Mobil will need oil prices to increase another 33% to cover the current dividend!
The company continues to prove that dividends are a priority, even during periods of severely distressed oil prices.
However, Exxon will need to significantly increase its cash flows to ensure the safety and longevity of its dividend.
Dividend Safety Rating: D
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