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Exxon Mobil Corp. (XOM) is a multinational oil and gas company. Founded in 1870, Exxon Mobil is now a $258 billion (by market cap) energy giant that employs 72,000 people. Exxon Mobil is fully integrated across its three business segments: Upstream, Downstream, and Chemical. With roots dating back to John D. Rockefeller’s formation of the Standard Oil Company more than 150 years ago, Exxon Mobil has proven out a rare kind of staying power.

But in all of its years of existence, the company might not have ever faced the kind of challenges it’s facing today. The world is starting to transition away from hydrocarbons, instead favoring renewable sources of energy that can more cleanly and sustainably power the global society of tomorrow. The market’s brutal punishing of this stock over the last 10 years is evidence of the challenges they face – this is a rare stock that’s actually down over the last decade.

However, every cloud has a silver lining. And this cloud might have a particularly luminous silver lining. I say that for two reasons.

First, the world still needs the type of traditional energy products that Exxon Mobil adeptly produces. Perhaps the world is using renewable energy almost exclusively 50 years from now. Perhaps not. In the meantime, hydrocarbons currently account for more than 80% of the world’s energy consumption. Europe’s recent energy crisis shows what happens when governments try to pivot too quickly toward renewable energy sources that are not yet ready at the proper scale. And that’s before even getting into the countless everyday products, like plastic, that require hydrocarbons for production.

Second, Exxon Mobil is reducing its annual capex budget from $30-$35 billion (pre-pandemic) to $20-$25 billion through 2027. Because the world is trying to wean itself off of hydrocarbons, Exxon Mobil is scaling back on exploration projects. This reduces production output, which should help oil prices (as a result of lower supply). Simultaneously, it frees up capital to be used toward debt repayment, buybacks, and increasing dividends. It’s that latter aspect – increasing dividends – that is of special interest here. Already, Exxon Mobil has increased its dividend for 39 consecutive years. That easily qualifies them for their Dividend Aristocrat status. The five-year dividend growth rate of 3.9% is nothing to write home about. 

On the other hand, the stock offers a market-smashing yield of 5.7%. That’s four times higher than the S&P 500’s yield. It’s also 70 basis points higher than the stock’s own five-year average yield. The payout ratio is admittedly a little hard to nail down right now, primarily because the last year has been so volatile for oil prices.

But their most recent earnings report – Q3 2021 – showed $1.58 in EPS, easily covering the $0.88 quarterly dividend. And in that report, CEO Darren Woods pointed to the strength of free cash flow: “Free cash flow more than covered the dividend and $4 billion of additional debt reduction.”

Morningstar rates XOM as a 4-star stock, with a fair value estimate of $76.00. CFRA rates XOM as a 4-star “BUY”, with a 12-month target price of $74.00. I came out slightly low, but the consensus is fairly tight here. Averaging the three numbers out gives us a final valuation of $74.17, which would indicate the stock is possibly 19% undervalued.

Bottom line: Exxon Mobil Corp. (XOM) is arguably more investable than it’s been in years. A leaner, meaner supermajor with more focus looks like a cash cow, yet the stock is priced like it was 15 years ago. With nearly 40 consecutive years of dividend increases, a market-smashing 5.7% yield, a possible near-term growth acceleration, and the potential that shares are 19% undervalued, this is a worthy long-term idea for income-oriented dividend growth investors.

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