Exxon Has to Outshine Chevron
Exxon Mobil Corp. (NYSE: XOM) sits in the same boat as rival Chevron, but there may be extra pressure for Exxon to lift its dividend more than Chevron. The oil and gas giant last announced that it would raise its dividend in April of 2014, but that was also long before lower oil prices took a toll. Our take is that Exxon wants to raise its dividend so that it can remain listed as a company that has endlessly raised its dividends over the years.
With the same longstanding dividend race with Chevron and other oil giants, and considering the much lower oil prices, Exxon Mobil shareholders should be very conservative when it comes to expecting dividends hikes in this climate. It is still likely to occur, but it could be a relatively token dividend boost and far less than the 9.5% hike seen in 2014. Exxon is likely to raise the dividend more on a relative basis than Chevron, because it has the lower yield of the two. This would allow management to say that they maintained their dividend hike trend.
Exxon Mobil earned $7.36 per share in 2014, yet the Thomson Reuters consensus estimate is $3.68 per share for 2015. Just 90 days ago, that 2015 consensus estimate was $6.70 per share. With a $2.76 annualized dividend as of now, how much can the dividend be raised? Exxon’s current 3.1% dividend yield compares to a yield of 4.0% for Chevron. Exxon could always spend less money buying back stock. Some companies have ceased buying back stock, just to accommodate a slightly higher dividend.
If Exxon does not raise its dividend, let’s just say that is yet another reason why Buffett dumped his entire stake in the company.
HP Needs a Dividend Spin-Off Too
Hewlett-Packard Co. (NYSE: HPQ) remains in a long-run turnaround plan, under the guidance of CEO Meg Whitman, but now the company is on the path to split itself up. When HP announced its dividend hike in March of 2014, the payout was raised by just over 10% to $0.16 per share. HP may feel even more pressure to raise its payout in the weeks ahead after its latest earnings report failed to generate anything better than a 10% stock sell-off.
What investors need to consider is that the pending split could alter dividend hike plans, and maybe not for the better. Nomura recently pointed out that its forecast brings up concerns about cash flows ahead. Also, Pacific Crest pointed to lower free cash flow in the PC business.
The days of growth at Hewlett-Packard have come and gone (though note that it did just announce it will buy Aruba Networks). Much of that PC business spike in 2014 has already tempered. Still, with consensus earnings estimates of $3.68 per share this year, having a $0.64 annualized per share payout just is not very impressive. Spin-off or no, HP may have very little choice but to raise its dividend again. Having a 1.8% yield in technology used to be impressive. It used to be.
IBM Dividends and Buybacks to Grow
International Business Machines Corp. (NYSE: IBM) is a business that is riddled with little to no organic growth. The company now boasts having Buffett as a top shareholder. IBM’s earnings growth has been financially engineered by cost cuts and endless share buybacks, but its dividend payout was raised 16% in 2014 (to $1.10 from $0.95 per quarter). Now that the company has already come clean in 2014 that it will not live up to a $20 in earnings per share goal by the end of 2015, IBM’s earnings are expected to contract minimally in 2015 and grow marginally again in 2016.
Despite IBM’s woes, it is a dominant member of the DJIA. Its $4.40 annualized dividend already generates a 2.75% yield, based on a $160 share price. That is high on the surface, but IBM’s share price was closer to $185 at its previous dividend hike — and IBM is expected to earn over $16 per share in 2015 and 2016.
IBM has raised its dividend for 19 years in a row, and Big Blue boasted in 2014 that the dividend hike also represented the 11th year in a row of double-digit percentage increases on that dividend. If IBM wants to maintain double-digit dividend growth, then IBM’s $1.10 per quarter dividend will have to go up to a minimum of $1.21.
Its upcoming annual meeting of stockholders will be held April 28, 2015, and it also seems very safe to expect that IBM will bring word of even more share buybacks at that time.