There are probably as many similarities between oil and gas giant ExxonMobil (XOM -0.01%) and chemicals company Dow Inc. (DOW) as there are differences between the two. To begin with, both offer regular income for dividend-seeking investors. ExxonMobil offers a yield that is little less than double of what Dow stock offers currently. Let's discuss certain key factors that you should consider before selecting one over the other.
Operations
Even after falling to half of the price at the start of the year, ExxonMobil's market capitalization is four times that of Dow's. Both companies' products and services are largely different with few overlaps. ExxonMobil is an integrated oil and gas company involved in exploration, production, refining, and marketing of oil and gas products. It also produces chemicals, which is where the two companies' businesses overlap.
Still, chemicals account for just around 10% of ExxonMobil's operations by its assets and accounted for less than 5% of its 2019 earnings. In short, ExxonMobil's fortunes are largely tied to oil and gas.
XOM Dividend Yield data by YCharts
Dow, on the other hand, is into the production of chemicals, plastics, coatings, and other industrial products used in packaging, automotive, construction, and hundreds of other industries. Its customer base is enormously diversified. This diversity provides relative stability to Dow's earnings compared to ExxonMobil, whose earnings are tied to volatile oil and gas markets.
Talking about similarities, both the company's earnings get impacted when economic growth slows down, as happened recently. Again, Dow is at an advantage as it serves a diverse range of industries. This allows the company to capture growth even when economic recovery remains uneven.
Dow's focus on cash flows
Another metric that differentiates the two companies is their cash flows. Dow managed to increase its cash from operations even in the challenging second quarter, thanks to its diversified customer base and a sharp focus on cash generation. In contrast, ExxonMobil found it difficult to generate any operating cash during the quarter.
XOM Revenue (Quarterly) data by YCharts
Dow is also focused on minimizing its costs. It is on track to reduce its operating expenses by $500 million in 2020. Additionally, it will generate nearly $1 billion from divesting its non-core rail and marine assets. Dow has also managed to keep its debt levels stable and its capital expenditures under control.
XOM Total Long Term Debt (Quarterly) data by YCharts
In contrast, ExxonMobil's debt has risen significantly, thanks to its massive capital investments in an incredibly challenging market. Elevated debt levels, combined with dwindled cash flow, put ExxonMobil in a tough spot.
It's all about dividends
In the end, what matters most to you as an investor is regular dividend income. Being in mature industries, both ExxonMobil and Dow offer limited growth potential but attractive dividend income. ExxonMobil has a long history of dividend payments. While Dow's dividend history since its spinoff from DowDuPont is short, the company's dividend record through its affiliates or predecessors goes back to more than 100 years.
Image source: Getty Images.
ExxonMobil's massive debt and diminished cash flows have put its dividend at risk. Though the company may decide to keep its dividends intact, that may not be the best approach and could make the company's path to profitability longer. Stock price can remain subdued till the time ExxonMobil doesn't reduce its leverage meaningfully. The stock's attractive 10% yield faces the risk of a dividend cut. Indeed, a cut should help ExxonMobil recover faster and allow it to again increase its payouts over time. But looking at the oil markets now, this may take years.
In comparison, Dow's yield looks safe. The company should benefit as the economy continues to recover, as is evident from an expected $250 million increase in Dow's third-quarter EBITDA from what it guided for at the end of the second quarter. A recovering economy, combined with Dow's strong cash flows, disciplined capital expenditures, and growth prospects, makes Dow a better buy than ExxonMobil today.
