Engine No. 1, which has been campaigning for change at Exxon since December, was elected to two board seats at the company’s annual shareholder meeting in May. On June 2, a third board seat was announced after the vote at the end of the shareholder meeting was too close to call. Three of the activist firm’s four candidates were elected to the board.
While climate change and the company’s prominent role in the fossil fuel industry were factors, Bank of America stated that the company’s significant retail ownership meant that capital allocation was perhaps the most important metric for investors.
“In the future, we expect the board drama to reinforce investor confidence in ExxonMobil’s capital flexibility, dividend certainty, and balance sheet integrity,” the firm said. “On both a DCF and dividend discount basis, we believe XOM remains materially undervalued.”
Exxon is a “iconic stock,” according to Bank of America strategists led by Doug Leggate, because it is the only name among its peers that will emerge from the last five years with the ability to grow its free cash flow.
Energy companies took a significant hit in 2020 as the pandemic reduced demand for petroleum products, briefly sending West Texas Intermediate crude futures into negative territory for the first time on record. Companies reduced capital expenditures and, in some cases, suspended dividends.
Exxon increased its balance sheet by $20 billion while maintaining its dividend. According to FactSet, the company’s current yield is 5.61 percent, which is the eighth highest in the S&P 500.
Exxon has paid an annual cash dividend since 1882 and has increased its payout for 37 consecutive years, according to Bank of America. As a result, it has become a “stalwart” for retail investors, with individuals owning slightly more than half of the outstanding shares.
Exxon chose not to raise the dividend during 2020′s downturn, but Bank of America believes the company’s free cash flow generation supports a higher yield in the future, implying the company will raise its payout by the end of the year.
Through 2030, the company expects a 5% increase in dividend per share. “XOM has demonstrated significant capital flexibility,” Leggate said, citing key growth projects, a layered pace of development, and a mix of short- and long-term developments, particularly in the Permian.
“With the first dividend increase since 2Q19 expected before the end of this year, we believe that, along with continued steady improvement in XOM’s balance sheet, a return of confidence in XOM’s dividend outlook will also mark the next steps towards closing the value gap,” the firm said.
Exxon has a $90 price target from Bank of America, which is 45 percent higher than where the stock closed on Monday.
Exxon’s stock has risen by 51% this year.
Analyst Doug Anmuth emphasized that Amazon is one of the top choice companies and told customers that the business might reach a key milestone next year. Anmuth anticipated that the epidemic dragged Amazon’s neck-and-neck with Walmart into retail market penetration for three years.
“Amazon’s share of US e-commerce increased from 24% in 2014 to 39% in 2020, while its share of total adj. retail sales increased from 2.3 to 7.9%. According to current estimates, we believe AMZN will overtake WMT as the largest US retailer in 2022,” the note said.
Walmart reported approximately $370 billion in net sales in the United States for the most recent fiscal year, excluding Sam’s Club. JPMorgan estimated Amazon’s comparable metric in 2020 to be $316 billion.
According to the company, consumer packaged goods, which include groceries, apparel, furniture, and appliances, will be three major growth areas for Amazon’s retail business in the future.
“These three categories account for two-thirds of total adj. retail sales, with current online penetration at 10%.
As a result, even if AMZN over-indexes on its share of online CPG/Grocery, the category is so large and has such low online penetration (7 percent in 2020) that it remains AMZN’s most promising source of growth, according to the note.
JPMorgan has set a price target of $4,600 per share, which is more than 35% higher than the stock’s closing price on Monday.
Amazon’s stock has underperformed in 2021, with a year-to-date gain of less than 4%.