Exxon Mobil's (XOM) shares are attractively valued and have an appealing risk-reward. Exxon Mobil is the free cash flow-strongest company in the energy sector and managed to consistently raise its dividend throughout the last energy bear market. The energy profits from rising price realizations and, therefore, has significant upside in a rising oil environment. Exxon Mobil is a promising investment for DGI investors, in my opinion, and an investment in the energy company yields 4.1 percent. The yield on cost will most likely rise going forward.
Bullish Recovery Setup
Crude oil prices are in bullish recovery setup, for two main reasons: 1. The U.S. economy is in its best shape in more than a decade, which is supportive of oil demand and price growth, 2. New U.S. sanctions on Iran have had a positive effect on oil prices (note: full sanctions will AmoonyFashion Top Closed Kitten Pu Heels Women's Boots Round White Zipper Toe Low rzxr1qn in the first week of November).
Exxon Mobil is, in fact, a directional bet on higher oil prices. Higher crude realizations tend to translate into higher earnings and free cash flow for Exxon Mobil.
Kinza Rose Navy Wedge Taryn Sandal Women's Oil prices are still in a bullish recovery setup.
Earnings And Free Cash Flow Upside In A Rising Oil Environment
Higher price realizations already made a big impact on Exxon Mobil's second quarter earnings. Higher energy prices compared to last year were the single biggest earnings driver for Exxon Mobil in the second quarter. The energy company's upstream earnings jumped $1.9 billion in the second quarter, largely thanks to higher market prices for crude oil.
See for yourself.
The higher oil prices climb, the bigger the earnings impact for Exxon Mobil.
Exxon Mobil has significant free cash flow upside in a rising oil environment as well. Free cash flow is a key stat for companies that investors can use to determine how much money is available - theoretically - for distribution (dividends and share buybacks).
Source: Exxon Mobil
Excellent Dividend Play
The single biggest reason for me to consider Exxon Mobil relates to the company's strong free cash flow profile. Exxon Mobil has pulled in more free cash flow over time than all of its competitors in the field. As a result, Exxon Mobil really is the most profitable energy company in terms of free cash flow.
Importantly, Exxon Mobil raised its dividend payout throughout the entire bear market which lasted from 2014 to 2016. While many other energy companies reduced their payouts (and some even went out of business), Exxon Mobil raised its dividend like clockwork, underpinning its investment proposition as a reliable income vehicle for DGI investors.
Here's Exxon Mobil's 10-year dividend growth chart.
Exxon Mobil's shares can currently be scooped up for ~14.7x next year's estimated profits, which is about in line with its U.S. peers Chevron Corp. (Platform Trace Safari Women's Marshmallow Puma vSwWqTAZx) and ConocoPhillips (COP).
Risk Factors Investors Need To Consider
The single biggest risk factor, as far as I am concerned, relates to a U.S. recession, and a corresponding decline in crude oil prices. I said earlier that Exxon Mobil is a directional bet on crude oil prices, but this obviously works both ways. As crude oil prices drop, Exxon Mobil is poised to take a hit to earnings and free cash flow.
New U.S. sanctions on Iran, which I think were the most significant event in the oil markets in the last several months, are a positive for oil prices over the short haul as Iranian oil production capacity gets taken off the market. Right now, the potential upside outweighs the potential downside.
Exxon Mobil is a compelling income vehicle for DGI investors, but shares also retain upside in a rising oil environment. Exxon Mobil is the free cash flow-strongest energy company in the sector, which provides investors with considerable downside protection. Most importantly, Exxon Mobil raised its dividend payout during the last brutal energy downturn that saw oil prices fall to their lowest levels in more than a decade. Thanks to a strong U.S. economic upswing, oil prices are still in a bullish recovery setup. Buy for income and capital appreciation.
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Kinza Navy Sandal Women's Taryn Rose Wedge Disclosure: I am/we are long XOM, COP.
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.