Exxon's Huge Buybacks and 4.1% Dividend Yield Give it a Total Yield of Over 8.2%
Exxon Mobil Corp (XOM) has started buying back significant amounts of common stock. In the past two quarters ending June 30, it has paid almost $6 billion on buybacks.
In fact, in Q2 it spent $3.9 billion on buybacks. That puts it on an annualized run rate of $15.68 billion, or 4.15% of its huge $377.5 billion market capitalization.
Its annualized dividend of $3.52 per share gives the stock a dividend yield of 4.1% at today's price of $85.75 (Sep. 23).
Moreover, Exxon is set to likely increase its quarterly dividend rate. For the past 19 years, it has hiked its dividend every year. The company has now paid 88 cents per quarter for the past 4 quarters. Therefore, by the end of Oct., it is likely to raise the dividend. Last year it announced a dividend hike on Oct. 27.
Assuming it raises the quarterly dividend by 2 cents to 90 cents, the new annual dividend will be $3.60. At today's price (Sept. 23) of $85.75, this will give the stock a 4.20% dividend yield
Exxon's Buyback Program
In the company's latest conference call management indicated that it expects to buy back $30 billion of its shares through 2023.
That means in the next 6 quarters it will spend $24 billion and buy back an average of $4 billion quarterly. That is what it did in Q2.
This puts its buybacks at an annualized rate of $16 billion, or a buyback yield of 4.2% (i.e., $16b/$377.5b). Over the next three years, Exxon might be able to reduce its shares by 10 to 12%.
That means for the same dividend cost Exxon's dividends per share could grow at least 10% in three years.
Moreover, Exxon has plenty of free cash flow (FCF) to continue this buyback program. This is the amount of cash flow from operations after deducting capital expenditures (which aren't normally part of earnings statements).
Free cash flow in the quarter totaled $16.9 billion. Shareholder distributions including buybacks were $7.6 billion for the quarter. This included $3.7 billion of dividends. In other words, buybacks and dividends were only 44.9% of its total quarterly FCF. That means that even if the price of oil fell 50% it could still keep up with this level of buybacks and dividends.
Where This Leaves Investors in XOM Stock
XOM stock has a total yield of 8.4%. This is seen by adding its 4.2% dividend yield to the 4.2% annual buyback yield. That is likely to help support the stock price. So far this year the stock is up 35%, but recently in the last month, it is down over 12%. This can be seen in the Barchart graph above.
Exxon is likely to report its Q3 earnings and dividends by the end of Oct. This means the stock's weakness today is a good entry point for value investors that believe the company will report large buyback activity during Q3 and a potential dividend hike then.
Bottom line: expect XOM stock to do very well over the next year given dividend growth as a direct result of its buybacks.
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