There has been much prognostication on the Exxon Mobil (XOM) dividend both here at Seeking Alpha and within the financial press. All that spilled ink is no surprise given the dividend yield has crossed into double digits, long heralded as a sign that at the payout as unsustainable – or at least according to market consensus. Why so much interest? Correctly calling a dividend cut on what still is a cornerstone income position for many retirees would certainly win any analyst or financial blogger some internet brownie points. Nearly all do not have the conviction to put capital at risk on that call by being short.

As something of a dividend cut soothsayer myself – Vermilion Energy (VET) and Occidental Petroleum (OXY) were two public energy bearish calls this year from me that explicitly called prior fat payouts unsustainable – I’d relish in the opportunity to make that call here. Problem is, I don’t think you can. While bulls certainly have had blinders on when it comes to both operational problems at Exxon Mobil as well as the relative valuation compared to direct comps, to me it seems like the bears are well ahead of themselves in forecasting a cut.

Why Dividends Get Cut

For any analyst or independent investor to make accurate (and timely) dividend cut calls, there are two (very) simple catalysts that have to be watched out for. This is quite broad brush, but readers will find that Exxon Mobil does not really check any of these boxes.

Before we get started here, yes Exxon Mobil has burned through quite a bit of cash this year. My working model for the supermajor calls for about $17.0B in operational cash flow (inclusive of a working capital hit) in 2020 against $19.2B in capital expenditures and $14.8B in dividends.

Exxon Mobil (XOM) has dropped below $35 giving it a current dividend rate of over 10%. That is a substantial distribution but not the main reason to buy because the dividend may indeed be cut as I discussed here “Exxon Mobil Needs Some Good News To Avoid A Dividend Cut”.

I have also written about Exxon when I thought it was overpriced “No Ha-Ha At Doha: Saudi Arabia Raises The Oil-Price Ante, And Exxon’s Credit Takes A Hit” and again when I thought it was a buy “Exxon Mobil: I Told You To Sell At $88, Now I’m Telling You To Buy At $48”.

I was certainly too early when I wrote that last article as Exxon has continued to drop over the last few months. But now at less than $35, I have come to the conclusion (again) that this really is the time to buy.

Here are 5 reasons I think it is time to buy Exxon regardless of what happens to the dividend.

1. The price is below $35 for the first time in 15 years

Well, not counting the 2020 COVID response when it dropped to $31. I see that as an aberration.

Source: macrotrends

That is a long, long chart and would suggest it is up from here assuming, of course, that oil prices recover at least to some degree.

2. How much of the price decline was due to removal from DJIA?

If we look at the price action since the announcement that Exxon was being removed from the Dow Jones Industrial Average (DJIA), we see a strong trend down.

So, how much of this downward trend was due to removal and how much due to oil prices?

As the chart below shows, the price of oil has remained relatively steady while the stock

Prepared by Chris

We recently started buying in the most-hated sector in the market right now, which of course is energy. In fact, we are approaching overweight as we have been buying heavily in the last two weeks. Sure, demand is poor right now. Supply is ample. It is not going to turn around tomorrow, but for the medium to long term, in the mid-$30 range, we believe that Exxon Mobil (XOM) is a strong buy.

Make no mistake about it. Exxon Mobil has survived every major downturn in energy and emerged stronger each time. While pricing impacts revenues, expect Capex spending to focus on bringing new projects on-line, but these can be cut and done so dramatically if the situation worsens. With this flexibility, as we move forward, we expect substantial improvement in all segments, as oil prices have stabilized and started to rebound.

Investors will be further paid a 10% dividend yield at these levels, though that could be cut, which might be viewed favorably by the market. XOM is staring at a huge cash crunch as bets on rising demand sour, which will force the company to cut jobs and may put its dividend in jeopardy. That said, winter is coming fast, even though fall hasn’t hit yet, we are seeing SOME demand rising with back to work/school, more cars on the road, snow and cold weather already hitting parts of the US. Oil has fallen far and taken energy with it. We think you need to capitalize.

Pricing pressure

Naturally, the price of oil and gas is what pretty much drives revenue for the company, in addition to changes in volumes. As energy commodity prices move higher, Exxon Mobil makes more money. With that said, revenues have begun to fall this year along with energy prices.