Also note that interest payments on debt compete for the available capital, and the ratings agencies will not endorse strong credit ratings if the books become too leveraged with industry trends seeing secular woes. Exxon had $26.3 billion in long-term debt and $25.6 billion in non-current deferred liabilities as of June 30. Those long-term debt levels have not changed much, but the near-term liabilities crept higher through the end of 2019.
Exxon has said in the past that it wants to defend its dividend. Most companies fund dividends through income, and Exxon has committed to selling assets and even using other sources of capital if needed. Unfortunately, asset prices are lower than they were before the pandemic. Many nations already are operating on lower production to keep the prices higher, and there might not be adequate storage to keep filling up the tanks to be sold in the future.
On top of the current woes, the secular demand issues will almost certainly persist. The world’s auto fleet will not be fully electrified by 2030 and maybe not even be in 2040, but that trend is not going away, and auto giants like GM and Ford have expansive plans to catch up to Tesla in the electric vehicle market.
To show both sides of the coin, note that not everyone agrees that Exxon’s dividend is at risk. The big concerns do look as though they are long term rather than short term, particularly if Exxon can cut costs further and can keep making selective portfolio changes with additional asset sales.
A sector report from BofA Securities noted that Exxon recently added about $18 billion in liquidity. The firm still has a Buy rating and $77 price objective, and it has defended it as the stock has slid this year. BofA also noted that the company retains significant cash on hand to bolster near-term liquidity, fund project spending and maintain its dividend. In short, it’s not a universal bet that Exxon’s dividend is in jeopardy any time soon.
A recent update from independent research firm CFRA noted that the 30% cut in Exxon’s spending budget was a means of protecting that dividend, with the reminder that the current dividend chews up about $15 billion per year. That said, CFRA further noted that the company could sustain its dividend in 2021, as long as crude oil prices do not relapse to lower levels.
Exxon has a very long history and is likely to be a survivor over time, even if it cuts this super-high dividend. 24/7 Wall St. even featured Exxon as one of the top oil survivors out to 2030.
Exxon’s dividend yield was 10.1%, based on the $34.33 share price before Thursday’s bad news, and its 52-week trading range of $30.11 to $73.12 should signal how bad 2020 has been. The drop of 3% to $33.30 on Thursday takes the dividend yield closer to 10.25%.
Exxon may be able to sustain its dividend for some time. It still seems safe to assume that the market will not blindly trust the dividend perpetually, if operating earnings and cash flow from operations do not eventually cover the payments.
It is also hard to forget that this oil and gas giant recently was ejected from the Dow Jones industrial average.