ExxonMobil Corp (XOM) generated strong cash flow from operations and free cash flow, although both were lower than last year. XOM stock is well off its highs, reflecting this lower performance, so is it time to buy? Based on its historical dividend yield, one value measure indicates it's a buy.
XOM is trading at $106.62 in midday on Monday, Feb. 3. That is well off its recent high of $121.79 on Nov. 22. That has piqued interest from value investors, as well as from short-put investors.
This article will delve into these issues and show one way to play the stock.
Strong Free Cash Flow
ExxonMobil reported on Jan. 31 that its Q4 cash flow from operating activities (CFFO) was $12.2 billion and its free cash flow (FCF) was $8.0 billion. FCF includes working capital changes on a net basis, and also capex spending.
The problem is these quarterly figures were down significantly from the prior quarter, as well as a year ago. For example, in Q3 Exxon's CFFO was $17.6 billion and its FCF was $11.3 billion. That means its cash flow, although still positive, was down -30.7% on a QoQ basis (CFFO) and -29.2% for FCF.
So, no wonder the stock is down. The market does not like this. The worry is that the company will not be able to increase its cash flow and hence its dividend and buybacks.
That worry may be overdone. Exxon has a way of looking at its cash flow that is not so bad. For example, it looks at the annual cash flow (getting rid of seasonal issues) and also adds back variable (i.e., likely one-time changes) items like asset sales and working capital changes.
This lowers the drop in cash flow as can be seen in a summarized version of its cash flow statement presentation below:
This shows that the company's CFFO after excluding working capital is only down 4.66% on a full-year basis and 9.5% QoQ. In fact, if you include asset sales, its CFFO actually rose 10.7% in Q4 vs. Q3 That is much lower than the 30% decline just looking at the CFFO performance figure (i.e., $12.2b vs. $17.569 b QoQ).
And that's not it. The company claims in its presentation deck (page 7) that its cash flow from operations has risen about 15% annually on a compound growth basis over the last 5 years (i.e., a CAGR of 15%).
In addition, on page 4 of the deck, Exxon claims it has a plan to increase its cash flow by $30 billion by 2030, i.e., in the next 5 years. So, maybe investors need not be too worried about the company's cash flow.
Dividends are Secure
After all, it looks like Exxon is still generating enough FCF to cover its dividend payments. For example, with 4.353 billion shares outstanding, its $3.96 annual dividend per share (DPS) costs the company $17.2 billion:
$3.96 DPS x 4.353b shs o/s = $17.237 billion annual dividend cost
That is well below the free cash flow (FCF) Exxon generated in 2024:
So, even though FCF fell 5.1% to $34.3 billion, the dividend cost is still just 50% of available FCF (and even less after excluding working capital):
$17.237 billion dividend cost / $34.362 billion FCF = 0.5016 = 50.1%
Moreover, last year the company spent $19.6 billion on share repurchases. That means it is covered, along with dividends by the FCF figure excluding working capital:
$17.237b dividends + $19.629 billion share repurchases = $36.866 billion compared to $36.2 billion FCF ex W/C
The bottom line is that even with its lower cash flow, Exxon is in a strong position to keep its large dividend and share buyback payments for shareholders.
Valuing XOM Stock
One way to value XOM stock is to use its historical dividend yield and compare that to its present yield. That way the investor can determine if the stock may rise further to achieve a lower average yield over the next year.
For example, Morningstar's dividend page shows that over the past 3 years, XOM has had an average yield of 3.49%. This is seen by averaging the 3.22% yield in 2022, 3.68% in 2023, and 3.57% in 2024 (i.e., 3.49% avg. yield).
Therefore using the present $3.96 dividend per share (DPS), the stock may eventually trade at almost $114:
$3.96 / 0.0349 = $113.47 per share
That is 6.4% higher than today's price. So, using a historical yield, XOM stock could be worth +6.4%, and possibly more, since this is an average figure (i.e., it could trade well over that to achieve this average).
Moreover, analysts see XOM stock as undervalued. For example, Yahoo! Finance shows an average price target of $129.63 for 28 analysts, and Barchart shows a mean price of $129.83.
In addition, AnaChart.com, which covers analysts who have recently written on the stock, reports that 27 analysts have an average price target of $127.22.
So, analysts see the stock as at least 19% undervalued. One way to play this is to sell short out-of-the-money (OTM) put options to set a lower buy-in price.
Shorting OTM Puts
For example, look at the March 7 expiration date for XOM put options. This shows that the mid-premium for the $102 strike price is $1.37 per put contract.
That means that a cash-secured short-put investor can make an immediate yield of 1.343% (i.e., $1.37/$102.00) over the next month.
This is what happens if the investor first secures $10,200 with their brokerage firm. That way it acts as collateral in case XOM falls to $102 over the next month and the account is assigned to buy 100 shares at that price.
The point is that this is a good way to set a lower buy-in target price and get paid while waiting to see if that happens. Moreover, the breakeven price if this occurs is lower at $102-$1.37, or $100.63 per share.
At that price, the investor will make an annual yield of almost 4%, since $3.96 DPS / $100.63 = 3.935%. Moreover, the upside is quite good. For example, at a target price of $127.22, the investor stands to make an expected return (ER) of +26.4%.
Summary
The bottom line here is that XOM stock looks attractive here. First of all, Exxon has plenty of cash flow to continue its large dividend and buyback payments.
In addition, based on its historical yield and analysts' price targets, XOM stock looks cheap.
Lastly, using an out-of-the-money (OTM) short-put play, investors can make a good income over the next month.
