If you think about the Rockerfellers and its founder John D., in the 1900’s he was America’s richest man and his company was called Standard Oil. The company was eventually broken up into pieces and the largest piece has become Exxon Mobil. For generations, the oil from around the world has produced profits and dividends, in terms of a business success, there are fewer places to have consistently earned a dividend. The power of Standard Oil and for the most part Exxon (there is a book called Exxon and American Power which discusses how Exxon runs the business) have gone hand in hand with foreign policy of the US. Sometimes it seemed foreign policy and Exxon’s interests were a little too close, but that is different story.
In an article by Jennifer Hiller, Ron Bousso and Dmitry Zhdannikov of Reuters, Exxon was expecting to report a loss of $2.63 billion (it actually did better than expected with a $1.08 billion loss). The loss was first back to back losses in 36 years, which has resulted in the shares being down 35% in the year to about $42.
Exxon has an annual payout of $15 billion in dividends and management is firmly committed to ensuring dividends are not cut. This has resulted in a 8% yield, if you believe people will drive a little bit more, than 8% looks very good and safe.
The problem is Exxon is not generating the cash to pay the $15 billion in dividends from production operations. This has resulted in the company cutting back both capital expenditures and expects to raise cash through asset sales. (not all the large oil companies are doing asset sales, as well as many small and medium sized companies).
Exxon is a company run by engineers and they have changed their employee review system internally referred to as forced ranking. If someone lands in the bottom ranking, they have 2 choices determine how they are going to meet the manager’s standards or leave with 90 days pay. The company has 74.900 employees worldwide but the standards are only for professional employees.
In April, Exxon cut their capital spending program by $10 billion to $23 billion. The spending was in new and expanded chemical and refining operations which would increase earnings by $4 billion to $21.5 billion with a $40 a barrel for oil. Asset sales between 2019 and 2021 were hoping to bring in $15 billion, so far sales are $3.7 billion and this year $86 million. Hoping 2021 will be better.
Linking to dividend paying stocks, for generations oil companies have been a very strong performer and in many dividend portfolios is a oil company. Management in all the oil companies are committed to paying dividends and shortly after a vaccine is available to the public, commuting should begin again. The dividends will not be a risk anymore.
There are more questions than answers, till the next time – to raising questions.