Exxon Just Raised Its Dividend By 3.9%. Its Free Cash Flow Has Surged 90% This Year. Here’s What That Gap Means
Key Points
The dividend raise is a small fraction of the extra free cash flow Exxon has generated so far this year.
Exxon spent $5.1 billion on buybacks last quarter versus $4.3 billion on dividends, and it cut net debt by nearly $11 billion over the first nine months.
Because the dividend is a fixed payment, Exxon needs to ensure it can remain sustainable throughout the market cycle.
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ExxonMobil (NYSE:XOM) just raised its quarterly dividend by another 3.9%, extending its growth streak to an industry-leading 44 consecutive years. That's a longer streak than 95% of companies in the S&P 500.
However, it was a very modest raise compared to its free cash flow, which has surged 90% year-over-year to $39 billion over the last nine months. That gap between the modest dividend increase and surging free cash flow isn't an accident, and what it says about how Exxon runs its cash is worth a closer look.
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Focused on the long term
ExxonMobil generated $19.1 billion in free cash flow during the third quarter alone, nearly as much as it produced during the first nine months of last year ($20.6 billion). That's enough cash to cover a year's worth of dividends with room to spare ($17.2 billion annually at its current $4.3 billion quarterly run rate). Clearly, Exxon has the capacity to deliver a much higher dividend increase.
However, the company's dividend payment is a fixed expense. Its cash flow, on the other hand, is highly variable. It has surged this year due to higher oil prices and refining margins caused by supply disruptions in the Middle East. When those disruptions finally ease, pricing and margins will fall, as will Exxon's free cash flow.
That's why the company is taking the more prudent course of action by allocating its current robust cash flows to repurchasing shares and strengthening its balance sheet, rather than supersizing the dividend. Exxon repurchased $5.1 billion of its shares during the quarter and has reduced its net debt by $11 billion year to date. That's increasing its future financial flexibility (the reduction in its shares outstanding will lower its future dividend outlay).
Exxon's 44-year dividend growth streak is no accident. The company has methodically capitalized on strong markets to build cash, preserving flexibility for future downturns. It allows the oil giant to continue growing its dividend during both good times and bad. That durability throughout the cycle is what makes Exxon one of the best oil dividend stocks to buy.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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