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My high-yield retirement portfolio has one simple strategy at its core. The right company at the right price. That means I'm looking for quality dividend growth stocks trading at fair price or better. This often means I need to take a contrarian value focused approach, hunting for bargains in the market's short-term trash bin.

This is where the proverbial babies gets thrown out with the bathwater, even venerable blue chips and dividend aristocrats. That's certainly been the case for Exxon Mobil (XOM), which has badly underperformed the market since the oil crash began in June of 2014.

ChartXOM Total Return Price data by YCharts

However this creates a potentially incredible long-term buying opportunity for low risk high-yield investors. That's because Exxon's yield is now at the highest level in 22 years.

Source: Ycharts

Let's take a look at why the industry's best management team is embarking on the most ambitious growth program in the company's history. More importantly learn why that is likely to generate generous, safe, and fast growing dividends for years to come.

Better yet? At today's valuations this also means Exxon is likely to generate market beating total returns in the coming years. This makes it the best time in nearly a quarter century to add this high-yield dividend aristocrat to your diversified income portfolio.

Exxon Mobil: Hands Down The Highest Quality Integrated Oil Major

Exxon Mobil's roots date back to 1870, when it was founded as Standard Oil of Ohio, part of John D. Rockefeller's oil empire. Today it's one of the world's largest integrated oil giants, with 21.2 billion barrels of proven reserves, sufficient for 14.5 years of production at today's levels. In 2017 the company delivered:

  • average production of 4 million barrels per day equivalent (oil & natural gas)

  • 5.5 million barrels per day of refined products (oil, diesel, jet fuel, heating fuel)

  • 24.9 million tons of petrochemicals (such as used in plastics and pharmaceuticals)

What's most impressive about Exxon is the company's long history of superior capital allocation. Basically that means that Exxon's management is great at investing shareholder capital into a vast but highly efficient empire of vertically integrated upstream (production), and downstream (refining, chemical) assets. These leverage the company's global scale far better than rivals.

(Source: Exxon Investor Presentation)

This industry leading returns on invested capital are thanks to the company's excellent track record of execution on big growth projects. By delivering far more projects on time and on budget, Exxon's need for write offs over the last decade was far below that of its oil major peers.

(Source: Exxon Investor Presentation)

In fact Exxon was the only oil major to actually generate positive free cash flow during the oil crash, when crude prices plunged 76% peak to trough.

(Source: Exxon Investor Presentation)

That was thanks to cutting costs by over 20%, including a 72% decrease in US shale oil development costs. Today Exxon estimates that its US shale assets (over 10 billion barrels of reserves), are capable of delivering 10% internal rates of return at a US oil price of just $35. And in the coming years Exxon hopes to get its break even cost company wide down to just $20 per barrel.

(Source: Exxon Investor Presentation)

And at today's $61 US oil price, Exxon has over 24,000 US wells capable of generating 10+% returns, with many generating 30+% IRRs.

In fact taking advantage of the US shale revolution is part of the company's incredibly ambitious growth plans. If successful they will turn Exxon into a free cash flow minting machine, and lead to strong dividend growth for years to come.

Ambitious Growth Plans Could Lead To A River Of Free Cash Flow

During the oil crash Exxon, like most oil majors, slashed capex. But while many of its rivals are still being conservative with their spending and growth plans, Exxon's new CEO Darren Woods, plans to crank up the growth spending to 11.

(Source: Exxon Investor Presentation)

In fact here's what the company plans to spend on growth:

  • 2016: $19 billion in capex

  • 2017: $23 billion

  • 2018: $24 billion

  • 2019: $28 billion

  • 2020 to 2025: average of $30 billion per year

Has Exxon gone mad? Probably not. Woods is a 27 year veteran of the company, whose primary focus was on the refining business. Management's plan calls for massive investments into not just US shale production, but also the refining assets to make use of them.

(Source: Exxon Investor Presentation)

Exxon specifically plans on increasing its US shale production 400% by 2025. However that's just a drop in the bucket of the larger fracking revolution. That's because the International Energy Agency projects that by 2023 US oil production will soar to 12 million barrels per day, up 20% from today's record 10 million bpd.

This will cause the US to become not just the largest oil producer in the world, but also the second largest net exporter, (5 million barrels per day), behind only Saudi Arabia.

But there's a problem, which is that US crude is actually much higher quality than those of our rivals (light and sweet). For decades the US was a major net importer of oil. In fact in 2005 US net imports peaked at 13.7 million barrels per day (today just 2.6 million). Much of this was from nations with heavier and sour crude, such as Saudi Arabia and Venezuela.

US refineries were designed and built to process this heavier and more sour crude, (denser and more sulfur containing). However US shale oil is light and sweet, meaning that it's pretty much only good for refining into gasoline. Heavy and sour oil is better for diesel and jet fuel.

(Source: Chevron Investor Presentation)

With US supply expected to soar both in the short and long-term, Exxon knows that the US needs not just much more refining capacity, but new, more efficient refineries that are tailored to the kind of oil the US is now producing.

(Source: EIA)

In addition along with oil the US shale gas industry is also booming, which the US Energy Information Administration expects to continue through at least 2040. Along with natural gas comes natural gas liquids, like ethane, propane, and butane. These are very useful as low cost feedstocks for the petrochemical industry which is now investing over $185 billion to expand its production and export capacity on the Gulf Coast.

Exxon plans to invest heavily into all three areas, production, refining, and chemical capacity, to achieve some truly startling goals:

  • increase production 25% from 4 million bpd oil equivalent to 5 million bpd

  • increase chemical production by 30%

  • achieve 20%, 20%, and 15% ROIC on production, refining, and chemical, respectively

  • double earnings from refining and chemical

  • triple earnings from oil & gas production

Why does Exxon think that these things are possible? Because despite the hype around the world's eventual transition to clean energy the fact remains that the world still runs on oil & gas.

For example for 2018 the IEA just upgraded its projected oil demand to 99.3 million barrels per day, up 1.5 million bpd and a new all time record. About 50% of this growth is from China and India, which continue growing like weeds. Currently the world is producing 97 million barrels per day of oil, creating a 2.3 million bpd shortfall that is rapidly depleting the world's inventories that ballooned during OPEC's price war with US shale.

Both Saudi Arabia and Russia have indicated that they are willing to extend OPEC's 10% production cuts, which are responsible for supply now being far below demand. This is because Saudi Arabia wants long-term oil prices of $70 in order to balance its budget, and IPO its national oil company Saudi Aramco. That's part of its ambitious plan to modernize and diversify its economy by 2030.

However even if OPEC doesn't extend these cuts the fact remains that demand for both oil and liquified natural gas is expected to keep rising steadily for decades. And since most existing oil wells have a 4.5% annual decline rate this means that massive investment is needed just to maintain the world's current supply, much less grow it by over 20% in the coming years.

So that's why Exxon says now is the time to strike and start spending big to get ahead of the curve. So what does Exxon think that its 50% increase in capex will produce? Well of course that depends on unpredictable oil prices. However even a range of realistic prices indicates that the company's earnings and cash flow should boom in the coming years.

(Source: Exxon Investor Presentation)

Keep in mind that Exxon's growth plans don't require oil prices to go higher, or even remain at current levels. In fact thanks to its falling break even cost Morningstar analyst Allan Good expects that Exxon will be able to achieve post dividend FCF breakeven at $40 per barrel in 2025.

In other words even if oil prices end up falling 38% from today's levels, Exxon's dividend would be sustainable.

Oil Price In 2025

Exxon Annual Free Cash Flow

FCF Payout Ratio (Current Dividend)


$15 billion



$31.5 billion



$45 billion


(Sources: Exxon guidance, Morningstar, Gurufocus)

And if current oil prices ($65) persist over the long-term? Then Exxon will be awash in cash, which is why management plans to return to historical dividend growth.

(Source: Exxon Investor Presentation)

Exxon has a legendary dividend growth record. For example it's paid a dividend for over 100 years. The company has also raised its annual payout for 34 straight years, (next quarter that jumps to 35), making it one of just three dividend aristocrats in the oil sector. The other two are Chevron (CVX), and Helmerich & Payne (HP).

More impressively the company has a good track record of not just growing the payout faster than its peers, but often faster than the S&P 500.

(Source: Simply Safe Dividends)

Over the past 20 years, which spans 1997 to 2017, when we had three major oil crashes, two economic recessions, and interest rates as high as 6%, Exxon has managed to deliver 7% CAGR dividend growth. In contrast the S&P 500's median dividend growth rate was 6.2%.

And with the most time tested and proven management team in the industry, Exxon investors have good reasons to trust that the company can deliver on its growth plan. That would make Exxon an excellent low risk high-yield dividend growth stock for the next decade. One that's likely to beat the market by a wide margin.

Dividend Profile: Generous, Safe, And Fast Growing High-Yield Means Market Thumping Total Return Potential



2017 Payout Ratio

Projected 10 Year Dividend Growth

Potential 10 year total return

Exxon Mobil



6% to 8%

10.1% to 12.1%

S&P 500





Sources: Gurufocus, FastGraphs, earnings presentation, Multpl, CSImarketing

My main goal with any investment is a safe and growing payout over time. That's why the most important thing I look at when deciding whether or not to invest in a stock is the dividend profile. That consists of three parts: yield, dividend safety, and long-term growth potential.

Exxon's yield is not just at its highest level in decades, but also more than double the S&P 500's paltry payout. More importantly the company managed to cover the dividend with cash flow in 2017, thanks to oil prices recovering nicely.

However there is more to dividend safety than just a sustainable payout ratio. The balance sheet also needs to be strong so that a company can both pay a generous dividend while still investing in the future.



Interest Coverage


S&P Credit

Exxon Mobil





Industry Average





Source: Gurufocus, Morningstar, FastGraphs, CSImarketing

Exxon's balance sheet is a fortress. The leverage ratio is about half as large as its peers, and its interest coverage ratio is sky-high. That's why the company has the strongest credit rating of any oil major which allows it to borrow at ridiculously low interest rates (avg rate 1.4%).

Source: Exxon Investor Presentation

As for Exxon's dividend growth potential, analysts are currently projecting 14% CAGR over the next decade. I consider that wildly over optimistic and prefer to assume a more realistic rate that's in line with the company's historical long-term payout. After all that's what management says its goal is, and Exxon has proven more than trustworthy over time.

So if Exxon can deliver 6% to 8% annual dividend growth over the long-term, that should allow it to easily beat the market by about 40% or so. That's thanks to the market's current frothy levels compared to Exxon's highly attractive valuation.

Valuations: Excellent Time To Snap Up The Best Oil Giant In The World

ChartXOM Total Return Price data by YCharts

It's been a rough year for Exxon, whose shares have underperformed most energy stocks, as well as the red hot S&P 500. However that's precisely the time that value investors like me are drawn to a company.


Historical P/OCF


Historical Yield





Source: earnings release, Gurufocus, FastGraphs

In addition to the dividend profile I like to analyze valuations two other ways. The first is a historical comparison of a stock's price to cash flow and yield vs its historical dividend yield.

On a price/operating cash flow basis Exxon doesn't appear historically undervalued. Of course with analysts expecting cash flow to grow about 15% in 2018, that would put the forward P/OCF at 9.0. So from that perspective Exxon appears a good buy. The current yield is significantly above the 13 year median yield, once more pointing to Exxon being a good investment at today's levels.

Finally I like to confirm a stock is undervalued by running a long-term discounted dividend model. This estimates a stock's fair price based on the net present value of future dividends.

Forward Dividend

Projected 10 Year Dividend Growth

Projected Dividend Growth Years 11-20

Fair Value Estimate

Dividend Growth Baked In

Discount To Fair Value


4% (conservative case)





6% (likely case)




8% (bullish case, based on analyst consensus)




(Sources: Gurufocus, FastGraphs)

For a discount rate I use what I consider to be the opportunity cost of money, 9.1%. That's because, since 1871 a low cost S&P 500 ETF would have generated this total return, after expenses.

Because any long-term model necessarily relies on smoothed out growth assumptions I try to use a range of what I consider realistic dividend growth rates.

Currently Exxon shares are pricing in virtually no dividend growth, which is ridiculously pessimistic. I estimate the stock is 16% undervalued which for a low risk dividend aristocrat is a fantastic margin of safety. This makes Exxon Mobil a strong buy, especially in this otherwise overvalued market.

Risks To Keep In Mind

Exxon may be the best name in its industry but that doesn't mean that there aren't numerous risks to keep in mind. Most of these are applicable to all integrated oil giants.

The first of these is the simple fact that Exxon sells commodity products, whose prices are set in world markets, and which management has no control over. That means its a price taker and ultimately its cash flow growth destiny is not its own.

Which brings us to the biggest company specific risk. The growth plans that management has outlined is far more ambitious than any of its rivals. That means that Exxon is going to face a lot of execution risk. It will need to deliver projects on time and on budget, as well as dealing with regulators and politicians in countries all over the globe.

That includes in emerging markets where political regimes and regulations can be fickle. For example Exxon has faced numerous challenges in the past, including in Russia, Nigeria, and Venezuela.

This is true of all global oil giants, and Exxon's track record for adapting to challenging conditions on the ground is top notch. However there is ultimately no guarantee that it can deliver on its growth plans, specifically the river of FCF that would be needed to return its dividend growth rate to historical levels.

In addition the company faces the potential for black swan litigation outcomes. For example early this year New York City filed a lawsuit against all the oil majors, including Exxon. The city claimed that these companies are responsible for climate change and thus must be held liable, via big tobacco style payouts, to cover the city's future costs in dealing with the negative effects.

This kind of lawsuit has been tried in the past, by cities such as San Francisco and Oakland. The cases ended up being thrown out when the court ruled that the EPA has jurisdiction in these matters, not local or state governments.

In addition the US Supreme Court ruled 8-0 in 2011 against a group of states and New York City that such lawsuits could not target companies operating fossil-fuel burning electric plants. Thus precedent is not on the city's side. However just be aware that court decisions are made by judges who are appointed by politicians. Thus in the future such cases might end up with different and highly negative outcomes for big oil companies.

Ultimately though the biggest risk for Exxon is that over the long-term the world is gradually shifting away from fossil fuels. This means that the company's long-term investment plans need to be based on models built on assumptions from leading industry analysts.

However no model is perfect, and so the company's projected growth in oil and gas demand might end up proving overly optimistic. For example analyst firm Mckinsey & Company has done its own long-term energy study.

It estimates that global oil & gas demand will indeed grow for decades. In fact by 2050 Mckinsey predicts that oil & gas will still make up 74% of the world's energy mix, down from 82% today.

However Mckinsey also warns that increased adoption of electric cars, which are expected to become cheaper than petroleum vehicles by 2025, could cause global oil demand to potentially peak by 2030.

Now the good news is that even if EVs become dominant much faster than most people currently expect, the increased need for electricity will still likely fuel strong demand for natural gas.

Source: Exxon Investor Presentation

So that means that Exxon's core business isn't going away anytime soon. However at some point the company will need to transition to renewable power in order to avoid becoming totally obsolete and going out of business.

That ultimately means that as a dividend growth stock Exxon may not necessarily be a "buy and hold forever" holding. But this high-yield dividend aristocrat is probably a good choice for those with a 10 to 20 year outlook.

Bottom Line: It's The Best Time In 22 Years To Buy This High-Yield Dividend Aristocrat

Neither I nor anyone can accurately predict short-term stock movements. So I'm not going to lie to you and claim that Exxon is set for glory over the next year or so. However what I do know for certain is that this is hands down the highest quality integrated oil giant, with the best management team in the industry.

And so when this dividend aristocrat says the time for massive investment is now, and that it can achieve huge growth in free cash flow that will lead to dividend growth at historical levels, I am prone to believe it.

And given the best valuation in 22 years, this means that Exxon Mobil is now potentially a great source of generous, safe, and fast growing income. One that's also likely to beat the market over the coming decade.

That's why I'm pounding the table so forcefully to recommend that all income investors consider this venerable high-yield aristocrat for their diversified dividend growth portfolios.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XOM over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article., index News of business criminal law politics soccer sports celebrity lifestyle video images in the world and the world today.

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