If there was one sector that saw the maximum slump during 2014, it was the oil sector. Crude oil prices went down badly and this affected all the oil companies – whether big or small. In the same year of 2014, crude oil prices that were around $100 per barrel came crashing down to less than $50 per barrel, pulling down the industry along with it. Profits were hit, dividends were cut and there was an overall sluggish ambience in the oil sector. In the midst of so many cost cutting intitiatives, there are two oil companies that are likely to increase their dividends in the near future. Sounds surprising, doesn’t it? Read on to know more:
Integrated business operations to the rescue
Two oil companies that are expected to increase dividends in the near future are Chevron (CVX, Financial) and ExxonMobil Corporation (XOM, Financial). Both these companies are not only strong in their financials, but are also wonderful dividend aristocrats. For the last 25 years and more, these companies have increased their dividends consecutively. The last increase was announced a year back, in 2014, for both these companies; hence investors are waiting with bated breath about the next increase any time from now. What makes these companies think about increasing their payouts, when their peers are busy cutting jobs and dividends? The answer is quite simple. Both Chevron and ExxonMobil have good downstream businesses to fall back on during crisis situations like these. When oil prices slump, it is the upstream businesses (exploration) that take a huge hit. The downstream businesses (refining) actually get to enjoy profits due to the huge spread of oil price differences.
During 2014, though net profits of these companies had declined considerably, revenues from downstream businesses were around $4.3 billion for Chevron and $3.1 billion for ExxonMobil. These were indeed great numbers considering the fact that most of the other oil companies struggled to scrape through. There was also a reasonable growth in the EPS of Exxon Mobile from $2.52 in 2013 to $2.76 to 2014 and from $4 in 2013 to $4.28 in 2014 for Chevron.
Initiatives to improve free cash flow
Only a company that has ample amount of free cash flow in its hand can afford to pay dividends to investors. Chevron and ExxonMobil are currently doing all kinds of activities to increase their cash flow generating capacity. As a first step towards that, both of them are planning to cut down their capital expenditure by a considerable extent. For 2015, the annual budget of Chevron and ExxonMobil have allocations worth $34 billion (reduction of 12% from 2014) and $35billion (reduction of 13% from 2014) respectively. Both these companies have sold off a total $10 billion worth of non-core capital assets during 2014 and have earmarked 2015 as well for many more such deals. Through all of these, they are planning to free up financials a wee bit, so that it can be used for generating free cash flow. With all these efforts in place, both the companies are setting high expectations among investors about an impending dividend increase.
Conclusion
Since all factors that instigate dividend payouts are working in favor of the companies, Chevron and ExxonMobil are expected to increase their dividends any time soon. This news will bring lots of cheers to investors and will help share prices increase as well. In a sector that is currently going through a tumultuous phase, these two oil companies are exploring all ways and means to live up to their title of dividend aristocrats. It cannot be denied that both of them have almost been successful in their efforts and now it is only a matter of time when the announcement actually comes from them.
