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Better Dividend Stock: ExxonMobil Corporation vs. Royal Dutch Shell plc

Reuben Gregg Brewer, The Motley Fool

ExxonMobil Corporation (NYSE: XOM) and Royal Dutch Shell plc (NYSE: RDS-B) are two of the largest integrated energy companies on the planet, with both stocks offering investors large dividend yields. Royal Dutch Shell's 5.1% yield easily beats Exxon's 4%, but does that make Shell the better dividend stock? The answer isn't that easy. Here's a closer look to help you figure out if Exxon or Shell is the better option today.

1. A brief dividend history lesson

Exxon has increased its dividend every single year for an incredible 36 consecutive years. That's particularly impressive when you consider that it operates in an industry known for dramatic, and often swift, price swings. Royal Dutch Shell, meanwhile, has a long history of rewarding investors with dividends, but like many peers, it was forced to halt annual increases following the energy downturn that started in mid-2014. It even began a scrip dividend to help preserve cash. To Shell's credit, it didn't cut the dividend and now that oil prices are higher it has ended the scrip dividend.   

Two men working in front of an oil well

Image source: Getty Images.

However, if regular dividend hikes are important to you, Exxon's incredible dividend history wins hands down.

2. Leverage is a wash

Another key issue to consider when looking at a dividend is the financial foundation that underpins the payout. A quick look at Exxon's balance sheet is very enlightening. Even though long-term debt levels increased from $6.5 billion in 2013 (before the oil price decline) to nearly $28 billion in 2017, long-term debt remained a modest 15% or so of the capital structure. Improving oil prices have allowed Exxon to trim that to just 10% or so more recently. Shell is much more aggressive with regard to long-term debt, which currently accounts for around 30% of the company's capital structure.   

At first glance, that's another win for Exxon, which clearly has more leeway on the long side of its balance sheet. However, Shell has historically carried a lot of cash. Cash currently sits at nearly $22 billion, much higher than Exxon's roughly $4 billion. When you add cash to the debt equation, the two are fairly close on the leverage front. I prefer Exxon's approach here, with low levels of long-term debt, but we'll call this one a wash.

3. What have you done for me lately?

One of the reasons for Shell's use of a scrip dividend was a large acquisition it made during the energy downturn. It was far more aggressive than Exxon, and other peers, during this difficult period. Now that oil prices have started to recover, Shell's more aggressive approach is paying off. That said, earnings were higher in 2017 and in the first quarter of 2018 for both companies. Where they diverged more notably was in production.

Shell's production was up 2.3% year over year in the first quarter. Exxon's production fell 3% on an adjusted basis. Exxon's drop, though, continues the downtrend that's been in place for two calendar years. This is an easy win for Shell.   

4. Valuation

Exxon and Shell have roughly similar price to tangible book values today, with Exxon at 1.79 and Shell at 1.70. At first blush, Shell has a slight edge on this metric.

XOM Price to Tangible Book Value Chart

XOM Price to Tangible Book Value data by YCharts.

But the absolute value doesn't tell the whole story. Shell's price to tangible book value is the highest it's been in a decade while Exxon's is the lowest it has been in a decade. So while they appear to be fairly close valuation-wise, investors have clearly been punishing Exxon's shares lately, giving the latter the edge on the valuation front.

5. Where to from here?

Investing is about looking to the future, so the last big question is "What do these two integrated oil giants have planned on the growth front?" Exxon, which tends to move slowly and deliberately, has been focusing on building its pipeline of investment opportunities. That's starting to show up in its reserves, which were up 6% in 2017. But, as noted by the production figures above, it isn't yet showing up in a way that will help earnings.   

The company is investing heavily in U.S. onshore oil and has major projects lined up in Guyana, Brazil, and Mozambique, among others, which it projects will account for 50% of its upstream earnings by 2025. It is also investing in its downstream businesses, with new plants planned on both the chemical and refining sides of its portfolio. It's projecting that its current spending could lead to a tripling of upstream earnings and a doubling of earnings on the downstream side of the business by 2025. With a solid balance sheet, it can easily afford the spending.   

A bar chart showing Shell's projected cash flow growth and production growth

Shell's got big growth plans and is growing production today. Image source: Royal Dutch Shell plc. 

That's a compelling story, but still nearly seven years away. Shell, however, is targeting free cash flow, since its priorities today are to reduce debt, invest in the business, and return value via dividends and buybacks. Like Exxon, it has notable projects in the works, including a sizable investment in liquefied natural gas, an increasingly important fuel source globally. The company is projecting that cash flow from operations could increase by as much as 50% between 2018 and 2020, with further increases between 2020 and 2025. That will be driven by a mix of production growth and cost controls. The first quarter's production growth and the recent canceling of the scrip dividend are clear evidence of the company's successful execution of the plan.   

Although both Exxon and Shell appear to have robust plans for the future, Shell has to get a slight edge here because its current results show progress toward company set goals. Investors still have to trust that Exxon will execute on its plans. Even though history suggests it can, a bird in the hand is, as they say, worth two in the bush.

Which is the better dividend stock?

To be fair, both Exxon and Shell appear to be pretty desirable dividend stocks. That said, Shell looks like the better choice for investors seeking to maximize current income today. It has big plans for the future and is already seeing results from its growth efforts. Dividend investors should be rewarded well along the way.

Exxon, despite a long history of annual dividend increases that Shell can't match, is currently working through a soft patch that will take a few more years to fully address. That said, if you are a value-focused income investor willing to take a long-term view (like me), you might prefer Exxon's low historical valuation.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.