Exxon Mobil (NYSE:XOM) continues to trade lower, pushing up its dividend yield, and making XOM stock a very interesting bargain and value play. From a peak of $64.66 on June 25, the stock has drifted down to $55.25 as of September 13. But, as I wrote last month, it is still worth over $75, given its historical dividend yield and price-to-earnings.
The good news is that Exxon is not likely to cut its quarterly 87 cents dividend. The energy company never got rid of its dividend payments during the late 2020 and early 2021 Covid-19 pandemic. Most other energy companies curtailed or cut out their dividends.
But not Exxon. So I see virtually no possibility of that happening any time in the future.
Valuing Exxon Stock With Historical Yield
As XOM stock has kept falling, the company’s $3.48 per share dividend works out to an annualized dividend yield of 6.45%. That is up from 6.32% last month when I wrote about Exxon stock.
Seeking Alpha data allows us to calculate the average dividend yield for XOM stock over the past five years or so as 5.63%. So far in 2021, the average yield has been 6.45%. In 2020 it was 8.12%, and 4.54% in 2019. In addition, the yield for 2018 averaged 3.93% and 3.69% in 2017. So the average for all this time (4.75 years) is 5.63%. We can use that to value the stock.
But the truth is, 2020 was an aberrant year. XOM stock fell out of bed, as did all energy stocks. If we exclude 2020’s unusually high year, the normalized historical yield over 3.75 years is 4.96%.
Here is how we can use that average yield to value XOM stock. Take the annual $3.48 per share dividend and divide it by the normalized yield of 4.96%.
That results in a price target of $70.16 per share. Since XOM stock is at $55.25 today, its upside is 26.9%. This, of course, assumes that the stock returns to its normalized dividend yield of 4.96%.
Using Historical P/E
Another way to value XOM stock is to compare it to its normalized price-to-earnings (P/E) ratio. For example, Morningstar.com says that the average forward P/E ratio for XOM stock has been 20.49 times over the past five years.
Analysts surveyed by Seeking Alpha now estimate that Exxon’s earnings will reach $4.31 this year and $4.82 next year. So, at today’s price of $55.25, its P/E ratio for 2021 is 12.8x and for 2022 it’s 11.5x.
Assuming XOM stock could rise to the 20.49x average P/E multiple over time, implies a potential gain of 60% this year (i.e., 20.49/12.8-1), and 78.17% for next year. The average of these two is a potential upside of +69.1%. Even if we used just the 2021 P/E, the 60% price target is $88.40.
That results in a price target of $93.43. Now we have two price targets. The historical dividend yield price target is $70.16 and the historical P/E target is $93.43, or $88.40 using just the 2021 P/E. The average of these two (using the 2021 P/E target, to be conservative) is $79.28 per share. That implies an upside of 43.5% for XOM stock.
What To Do With XOM Stock
Everyone hates energy stocks these days. In a nutshell, that’s why it’s so cheap. Institutional funds, following ESG (environmental, social, and governance) seem to think that energy stocks like Exxon are not worth investing in. The reality is that energy companies are going to be around for a long time. Right now its historical yields and P/E values make XOM stock a bargain.
So if you are not averse to taking a contrarian view and buying an energy stock like Exxon, you are going to get paid to wait for the stock to rise. That in essence is what value investing is all about: buying unloved stocks that have a margin of safety. In this case, the margin of safety is the dividend yield and its historical relative undervaluation.
On the date of publication, Mark R. Hake did not hold a position (directly or indirectly) in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.