Market Commentary: #1 Oil Stock, Period

It’s easy to get distracted by the energy sector when Buffett is snapping up Occidental Petroleum shares with abandon and already owns so much of Chevron. But arguably both should be cast aside in favor of what might well be the #1 stock in the sector, Exxon Mobil.

With a market capitalization of around $400 billion and generating revenues of $338 billion, Exxon is priced at a modest premium to revenues and pays a 3.7% yield to appeal to income investors.

But what is it about this energy giant that puts it top of the pile?

Key Points

• Exxon produces enormous cash flows and analysts peg fair value at $124 per share.
• It has maintained dividend payments for 54 years and raised its dividend for 41 years consecutively.
• A discounted cash flow analysis projects upside of close to 24%.

Why Exxon Is #1

On a host of metrics, Exxon ranks highly. Not only does its market capitalization eclipse most rivals but on the all-important cash flows it stands head and shoulders above its peers too. In the past twelve months, levered free cash flows eclipsed $32 billion alone.

With such enormous cash flows it’s no surprise that a discounted cash flow forecast analysis pegs fair value at $124 per share, which ironically is almost identical to analysts fair value of $125 per share.

The cash flows are also reflective of the impressive profitability reported by management virtually every quarter. Over the past year, the earnings per share figures have been hovering around the $2 per share area quarterly.

In spite of its size, net income is also set to rise over the next 5 years at a CAGR of 11.6%.

Why Buy Exxon?

One compelling reason to buy Exxon is for its dividend yield of 3.7% that it has maintained for over half a century and, even more impressively, has increased for 41 years straight.

If there were a drawback, it would be six analysts downgrading earnings estimates for the upcoming period. Nonetheless, the company’s profitability has been impeccable for years and the odds of the dividend streak being broken or placed in jeopardy is very low. The payout ratio of 41% supports that bullish thesis.

When combined with fair value upside potential of 24%, new investors have the potential to earn both a solid income enjoy upside share price potential.

Another attractive quality is the relatively low price volatility that will appeal to conservative investors. That high level of predictability and the overall stability evident over past years supports a bullish investment thesis.

While Exxon is unlikely to be a disruptive innovator anytime soon, it has a proven history of rewarding shareholders – look no further than the 9.4% shareholder yield – and shows no signs of deviating from that path.