A Pair of Big Oil Dividend Increases Are in the Pipeline

big-oil-dividend-increasesThe oil crash has left most energy companies in an extremely weak condition. West Texas Intermediate crude oil collapsed from over $100 per barrel at its 2014 peak, all the way down to $45 per barrel earlier this year. Fortunately for the energy industry, the price of oil has since recovered somewhat to $55 a barrel.
But the scars remain. Most oil stocks are well below where they were before the collapse in oil prices. Some energy companies – mostly in the exploration, production and offshore drilling industries – had to cut their dividends to stay afloat.
With all this in mind, it might seem crazy to suggest that two of the world’s biggest oil companies are about to increase their dividends. But it’s true nonetheless. Integrated oil and gas giants Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) are very likely to increase their shareholder payouts by the end of the week.
It goes without saying that the past year was a brutal one for Big Oil. Chevron’s total profits fell 10% last year, to $19.2 billion. Not surprisingly, this was due mostly to its oil and gas exploration and production business, where profits declined by 18% in 2014.
However, downstream refining served as a nice offset to Chevron’s upstream deterioration. Thanks to stronger refining spreads, downstream profits nearly doubled for the year to $4.3 billion.
Exxon Mobil earned $32.5 billion in 2014, flat from the prior year. Like Chevron, Exxon Mobil was boosted by refining profits, which totaled $3.1 billion for the year.
Integrated business models are saving both companies right now. Because integrated majors hold both upstream and downstream operations, they are less sensitive to lower oil prices. The refining business tends to enjoy higher profits when oil prices decline substantially, because it increases refining margins.
Normally, anticipating dividend increases from two companies during a brutal operating climate would seem foolish. But Exxon Mobil and Chevron are famous for their dividends, to the point that both companies know how seriously investors take their payouts. Deciding not to increase a dividend would not be a big issue for most companies, but it would be for Exxon Mobil and Chevron.
For income investors, these two Big Oil dividend stocks are especially beloved. They’re both members of the exclusive S&P 500 Dividend Aristocrat list, meaning they have raised their dividends for at least 25 years in a row. And, they offer two of the highest dividend yields in the Dow Jones Industrial Average. Exxon Mobil and Chevron yield 3.2% and 3.9%, respectively.
Over the past five years, ExxonMobil increased its dividend by 10% per year, compared to 9% per year for Chevron. This sets a precedent for regular dividend growth, although the oil collapse will likely mean neither company reaches their average dividend growth.
But modest dividend increases, between 3%-8%, are still entirely possible. Both Exxon Mobil and Chevron have taken steps in recent months to raise cash, presumably in anticipation of their dividend increases. Last year, Exxon Mobil cut capital expenditures by 9% and sold $4 billion of assets during the year to help raise more cash. This year, it plans to spend approximately $34 billion – another 12% spending reduction.
Likewise, Chevron plans a similar 13% reduction in its 2015 capital spending budget, to $35 billion. Meanwhile, it announced that it plans to sell $15 billion worth of assets through 2017, after divesting $6 billion last year.
Separately, Chevron will suspend its share buyback program this year. It had previously been buying back its own stock at a rate of about $1.25 billion per quarter. Along with reducing capital expenditures, suspending the buyback will help Chevron save cash.
It’s now been a full year since both companies last raised their distributions, meaning it’s time for another increase. Exxon Mobil and Chevron will want to keep their streaks alive, to ensure that they remain on the Dividend Aristocrat list. Both are suffering declining profits, but the combination of diversified business models and significant spending cuts should allow both to raise their dividends – albeit modestly – once again this year.

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When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.

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