The long time powerhouse in the oil and gas industry, Exxon Mobil (NYSE: XOM) has had a tough time lately. Last year, 2017, wasn’t kind to shareholders. The beginning of 2018 looked promising, but then the company announced earnings and the stock tanked.
What is going on with Exxon Mobil? Is this stock a has-been and investors should look for other companies who are growing at a rapid rate? Or is the drop in Exxon Mobil stock price a perfect time to buy shares at a discount?
Here are the reasons why I believe an investment in Exxon Mobil is a smart move to make with your money.
The Recent History Of Exxon Mobil
The past few years have not been kind to Exxon or any oil and gas stock. Crude oil prices were in a downward trend and only recently began to stabilize. Falling oil prices are bad for these companies because they use the higher price to fund capital expansion and pay shareholder dividends.
Since oil prices were falling, many of these companies had to go into debt in order to expand and pay dividends. And we all know that a company in a mountain of debt is bad.
Luckily, Exxon is in excellent financial shape. They did add debt from 2014 through 2017, but now that oil prices have stabilized, they have enough free cash flow to pay their dividend without going into debt.
This is important to know, as no one wants to invest in a sinking ship.
The start of 2018 looked promising for Exxon Mobil, with shares climbing to $88. But then the company reported earnings and the bottom fell out. The stock dropped over $12 on heavy trading.
On the surface, the results looked concerning. Earnings per share came in at $0.88, missing estimates by $0.15. Revenues were up 18% but missed by $8 billion. Many analysts and investors were confused with what was going on.
How could this powerhouse have missed on estimates so badly? The truth is, the company is pouring a lot of money into capital expansion, which in the long term will only help make this company stronger.
By investing in both upstream and downstream segments of the company, Exxon is hoping to limit the potential impact falling oil prices will have on its future business.
So while in the short term it looks concerning that Exxon missed so badly on earnings, the truth is that they are preparing for a better long term.
Why Now Is The Time To Invest In Exxon Mobil
Now is the time to invest in Exxon. The stock price is lower than its historical norm and the future is extremely bright for this company. Add in a rock solid balance sheet and a management team that has proven to return shareholder value, and this stock is ripe for future growth.
But it won’t happen overnight. It will take time for the expansion projects to be completed, come online, and start generating revenue. While some investors might want the stock price growth now, know that you can sit back and be patient because of the dividend.
Right now Exxon Mobil is yielding just shy of 4% and they have raised dividends for 35 consecutive years. There is no sign or indication this will change, so as you wait for the stock price to rebound, you can collect a healthy dividend.
Don’t be fooled into looking at the short term when it comes to Exxon Mobil. Yes the company missed badly on estimates, but if you dig deeper and understand why they missed, you will understand why the future looks so positive for the company.
While the stock won’t start generating meaningful gains in the short term, investors can enjoy a healthy and increasing dividend as they wait for the stock to respond to the work the company’s management is putting forth to make Exxon even more stronger of a company.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.