The Lights Are Flashing Green for Exxon

I was told there would be no math. That is one of my favorite jokey responses to any difficult situation, but here’s a little scoop: investing is math. There is just no way around it. As those who go on CNBC and pontificate about disruption and all sorts of other non-quantifiable concepts, the professionals always make sure the numbers add up. Or some of them do, anyway. I am one of those pros, and it is always striking to me how many innumerate situations occur in the markets.

But it is tough out there for income investors because our current innumnerates-in-chief, Powell and Yellen, have created a situation where there are no guaranteed returns in anything resembling a fixed income instrument. Thus, income investors have to search for returns, and that is an unheralded task.

One great example is Exxon Mobil (XOM) , a name I own and have written about frequently for Real Money. At this moment, Exxon shares are yielding just above 6%. That’s a fat yield, and one of my proudest moments was my call last fall, when XOM shares were heading for $30, that that dividend — Exxon’s current payment is $0.87 per quarter — was, and is, safe. So a representative bond for Exxon, the 3.567% coupon bond due in 2045, is now trading at 110 cents on the dollar and yields a paltry 2.98%.

You can buy the stock and get 6% or buy the bonds and get 3%. Even an innumerate could figure that one out. It’s a situation caused by Powell, Yellen and the rest of the central bankers of the world, and it brings the inherent risk in equities, especially in the energy sector to the fore. Powell and his feckless cronies choose to exclude food and energy prices from “core” CPI owing to the volatility of those prices, but as usual, they have no idea what they are talking about.

Energy prices have not been volatile at all in 2021. Not in the least. But they have risen, and as the Henry Hub natural gas futures contract today hit $4/mmBTU for the first time since November 2018 — that was a short-lived spike, the natgas futures contract hasn’t sustainably held $4 since 2014 — and companies that produce that commodity as well as black oil have an extraordinary amount of pricing power. That should drop to the bottom line. And it will for Exxon.

Prices for crude as measured by the international benchmark, Brent, have been above $70/bbl every day (except for Monday’s hiccup) since late May and have been above $60/barrel every day since late February. Exxon is a commodity company, and prices for its main — but not its only — commodity are at levels well above Exxon’s cost to produce it. That drops straight to the bottom line and we will be reminded of that again when XOM reports earrings next Friday.

Yahoo Finance puts the consensus for Exxon’s EPS at $0.97 for the second quarter and $3.88 for 2020. Yet, Exxon shares are trading at $57 today, so only 14.7x this year’s earnings, a strong discount to the S&P 500’s current P/E of 22.4x, according to market savant Ed Yardeni. Yet, XOM yields 6% versus the S&P’s current yield, according to multpl.com, of 1.33%.

The lights are flashing green for XOM based on any kind of quantitative analysis.

Those in the mainstream media will focus on machinations within Exxon’s Board (the “woke” element only controls three of 12 board seats) or some kind of concocted, hidden camera nonsense, but those of us in the numerate community will continue to own XOM because it’s just too darn cheap.

Don’t overthink it. The math tells the story. Buy XOM.