Allocating to Exxon

The Gist: We make a case for 9% per annum share price appreciation and 3% dividend yield based on present capital allocation strategies.

An old rule of thumb is that when ExxonMobil’s dividend yield rises above 9%, it often signals that the stock is near a bottom and about to go on a strong run. The same rule of thumb held for Standard Oil when its shares traded on the New York Curb Exchange.

Since the 1950s, the dividend has never been cut. Purchasing the shares at a 9% dividend yield is effectively a bet that the market is overestimating the permanence of the prevailing macro headwinds and underestimating management’s commitment to the dividend.

During World War II, a significant portion of Standard Oil of NJ’s production came from Venezuela, while global operations were disrupted by the war and the German U-boat campaign. Those disruptions pressured operations and cash flow, temporarily constraining distributions to shareholders. By the early 1950s, however, the company had resumed its long-standing commitment and raised the dividend aggressively to make up for lost time.

ExxonMobil and Chevron together account for roughly 43% of the traditional oil & gas sector’s market capitalization. As a result, monitoring their capital allocation decisions—and particularly those of ExxonMobil—remains critical for the sector and set the precedence among the rest.