It depends on how you view the stock’s dividend yield.
ExxonMobil (XOM 2.68%) has a gargantuan market cap of over $500 billion. It is a massive company by any measure, and also among the largest in the energy sector. The dividend yield, meanwhile, is a solid 3.3%, which is well above the S&P 500 Index’s 1.2% and a hair higher than the 3.2% on offer from the average energy stock, using Energy Select Sector SPDR ETF (XLE 2.04%) as an industry proxy.
There are some good reasons to consider buying Exxon right now. And some reasons to hold off.
What does ExxonMobil do?
A simplistic view of Exxon is that it is an oil and natural gas company. That statement isn’t wrong, it just doesn’t cover the full spectrum of what Exxon does because it is an integrated energy company.
That means that it has operations in the upstream, which involves the production of oil and natural gas. It has operations in the midstream, which is where you’ll find pipelines and other energy infrastructure that moves oil and natural gas. And it has operations in the downstream, which processes oil and natural gas into refined products and chemicals.
Image source: Getty Images.
Each segment of the broader energy industry operates a little differently. Upstream earnings and profits are highly dependent on the price of oil and natural gas. The midstream is largely a fee-based business, where assets generate reliable cash flows in good markets and bad because of a toll-taker model. And the downstream can benefit from low energy prices because oil and natural gas are key inputs, but many of the products produced (such as gasoline) are commodities and subject to their own price volatility.
Having such broad industry exposure diversifies Exxon’s portfolio of businesses and helps to soften the peaks and valleys over time. Oil and natural gas prices are still the driving force, but the impact won’t be quite as material as it would be for a pure-play upstream company that only produces oil and natural gas.
In short, Exxon is the type of energy company that you can hold onto for the long term, even with the fluctuations in the inherently volatile energy sector.
Is now the time to buy ExxonMobil?
So if you’re looking to increase your exposure to the energy sector, Exxon is a solid option at just about any time. But that doesn’t mean that Exxon is always an opportunistic investment to make. As noted, the company’s stock price tends to wax and wane along with the price of oil and natural gas.
Right now, energy prices aren’t exactly high or low. So it is a bit of a coin toss on whether you would want to buy Exxon’s stock this very second. However, it isn’t necessarily cheap, at least from the perspective of its dividend yield.
The current 3.3% yield is reasonable, but during energy downturns it can spike toward 10% (which means the stock price has declined materially). Dividend yield is notable here because Exxon has designed its business to support its dividend through good energy markets and bad ones.
Management has largely accomplished this by having a low level of leverage on the balance sheet, as that provides the leeway to increase leverage during hard times to support the business and the dividend. When oil and gas prices recover (along with profits), management reduces leverage.
The proof of how successful this approach is shows up in the 42 year streak of annual dividend increases the company has racked up. So, if history is any guide, Exxon is cheapest when its yield is highest. And that’s probably the best time to buy it.
Be strategic with ExxonMobil
Exxon is a great pick if you need to add some energy exposure to your portfolio for diversification purposes. Now isn’t a terrible time to buy it, either, but the stock has most certainly been cheaper. Thus, if you can wait, you might want to keep Exxon on your wishlist for the next oil downturn, when the yield will be high and the stock price low.
It will take some serious fortitude to use such a contrarian investment approach, but that’s likely to be when you get the best price on this industry leading energy company.
