Exxon Stock Looks Like a Steal at 11x P/E With A 6.3% Dividend

Dividend Stocks

Early last month I wrote that Exxon Mobil (NYSE:XOM), then trading for $60.14, was worth at least 25% more at $75.19. At the time, XOM stock had a 5.76% dividend yield and traded for 16 times forward earnings.

A view of a well-lit Exxon Mobil (XOM) gas station in Pasadena, CA during nighttime. representing exxon mobil stock

Source: Michael Gordon / Shutterstock.com

The good news is that Exxon is now cheaper at $55.10 as of August 24, and has a much higher dividend yield and lower price/earnings (P/E) ratio to boot.

For example, given that the company pays a quarterly dividend of 87 cents, and very clearly is not going to cut that dividend payment, its annual payment is $3.48. This puts its annual yield well over 6% at 6.32% (i.e., $3.48/$55.10).

Moreover, based on analysts’ estimates for 2022 of $4.76 per share (i.e., up 11% over 2021 analysts’ forecasts of $4.29), its P/E multiple is only 11.57 times.

The outlook for the company is still positive as well. Oil and gas prices are still rising, especially as world economic growth is still very much positive for this year and the same is forecast for next year.

Valuing Exxon Stock Using Historical Dividend Yield

At the same target price of $75.19 as in my article last month, XOM stock has a higher upside, i.e., 36.5% from today’s price. This is higher than my estimate last month of a 25% potential return. Here is how that target price was set.

Seeking Alpha shows data that allows us to calculate the average dividend yield for XOM stock over the last five years or so as 4.39%. For example, in 2021 so far, the average yield has been 5.38%. In 2020 the average yield was 4.84%, and 3.93% in 2019. In addition, the yield for 2018 averaged 3.44% and 3.28% in 2017. So the average for all this period (4.75 years) is 4.39%. We can use that to value the stock.

The good news is that the earnings per share (EPS) estimates for this year and next year (i.e., $4.29 and $4.76) will cover its $3.48 annualized dividend per share. So if we divide $3.48 by 4.39% (see above), the stock has a price target of $79.27 per share (i.e., $3.48/0.0439=$79.27). This is even higher than my previous target price.

We can use the same method using Exxon’s historical P/E ratios.

Valuing XOM Stock Using Historical P/E

Morningstar.com reports that the average forward P/E ratio for XOM stock has been 20.87 times over the past five years. Since Exxon has a much lower P/E ratio right now, XOM stock could rise to this average P/E multiple.

For example, analysts’ estimates for 2021, as I showed above, are $4.29 per share. So, at 20.87 times this estimate, the target price, using a historical metric, should be $89.53. That represents a potential upside of 62.5% over today’s price of $55.10.

Right now there is no catalyst pushing the stock up to those levels. Let’s say it takes 2 years for that to happen. Then the average return would be 27.6% on a compound average annual return (CAGR) basis. That means that its price target for next year would be $70.16 per share.

Now we have two potential value targets. Using historical dividend yield the price target is $79.27, and using historical P/E multiples it’s $89.53, or $70.16 over two years. Therefore the average price target is $84.40 or $74.72 if it takes 2 years to occur.

To be more conservative, let’s stick with the lower price target of $74.72. This still represents an upside of 35.6% over today’s price of $55.10.

Where This Leaves XOM Stock

There are always seemingly good reasons why a stock like Exxon Mobil falls like this. For example, Morningstar analyst Allen Good, CFA, reports that Exxon’s cash flow has been strong enough to significantly reduce debt. But here is what he said about why the stock is weak:

Unlike peers, Exxon has yet to introduce repurchases, while the dividend has remained flat for two years….We expect Exxon to maintain focus on capital discipline given recent activist pressure, new board members, and past relative underperformance.

In other words, management is not going to buy back shares, despite the pressure to do so. This is why the stock is cheap right now. Investors don’t like that. The market seems to want a higher dividend, or share buybacks, or possibly even both at Exxon.

That is your opportunity. The stock is cheap by any measure on a historical basis and worth at least 36% more at $74.72. Most value investors will take advantage of this bargain opportunity and begin to take positions in XOM stock.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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