2020 has meant a perfect storm of headwinds for Exxon Mobil (NYSE:XOM). First, of course, the novel coronavirus pandemic. I don’t have to tell you why the virus, and the resultant “stay at home economy,” has decimated demand for crude oil. In turn, it has also meant big losses for XOM stock.
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But, that’s not all! In addition, this year has also brought a major pivot toward “clean energy.” We know that full well from the strong performance of electric vehicle (EV) and other “green wave” stocks.
Topping it all off is the contentious 2020 U.S. presidential election. As of this writing, the results are still pending. Yet, former Vice President Joe Biden, who vowed to “transition” us away from oil, is just a few electoral votes away from securing victory.
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All together, this is bad news for big oil.
With all these negative factors at play, it’s no surprise Exxon shares remain near multi-decade lows. But even at today’s prices (around $33.15 per share), shares could head even lower from here.
Beyond the pandemic and the election, long-term economic and political changes are not in its favor. The result? A continued reversal of fortune for this once-venerable blue-chip stock.
XOM Stock Has Multiple Hurdles to Jump
Post-election, is the worst priced into Exxon’s beaten-down shares? Not exactly. The bear case goes beyond who ends up winning the presidency. That is to say, even if incumbent President Donald Trump manages to win the remaining states up for grabs and secure re-election, it won’t make a difference.
Even with a president more friendly to big oil, the demographic and economic factors pivoting us to the “green economy” are moving forward. As I discussed last week, millennials and Generation Z are more concerned with environmental issues. The oldest millennials are pushing forty and moving into positions of economic and political power. Coupled with Generation Z coming of age, it’s clear “green” policies are no longer on the political fringe.
All of this plays into the continued growth of EVs. Sensing the shift, the entire automotive industry is adapting to this megatrend. Sure, we’ll still have internal combustion vehicles a decade from now, but as the EV share of the overall auto market continues to climb, expect crude oil prices to remain depressed. And if oil can’t get out of its current rut, expect Exxon Mobil to remain “stuck in neutral” — or even worse — as well.
Don’t Let High Yield Cloud Your Judgement
The underlying trends don’t bode well for XOM stock. But despite these terrible prospects, some investors may still be tempted to dive into this stock that’s fast falling out of favor. Why? Some could see it as a great contrarian play. Yet, there’s a difference between going contrarian on a stock and trying to catch a falling knife.
Simply put, you have to read the room. The winds of change are blowing in the wrong direction for Exxon Mobil stock. But it’s not just contrarian investors who may be interested in this hard-hit, once venerable blue-chip.
The high dividend yield (10.49%) of XOM stock may be another factor that’s enticing misguided investors. In a low-interest environment, this is catnip for those searching for yield. But again, you have to read the room.
There’s good reason why Wall Street has priced Exxon Mobil shares to the point where its dividend is in the double-digits. This fat yield isn’t coming out of profit. Right now, the company is generating losses. To sustain its current high payout (and keep its 38-year streak of dividend growth going), the company is borrowing heavily to avoid a dividend cut.
This strategy may work in the near term, but if this continues, something’s got to give. Some sort of dividend freeze or cut is inevitable.
If this happens, expect shares to fall further. The dividend is one of the few things shoring up its current share price. Without it, the investor exodus out of this blue-chip will continue.
Bottom Line: Exxon Isn’t Coming Back, So Steer Clear
Sure, the near-term headwinds hammering this stock could subside. The economic environment could improve, if and when the pandemic recedes. Joe Biden’s remarks about big oil could wind up being all talk and no action, with minimal short-term changes to U.S. energy policy.
Yet, the long-term factors working against Exxon remain in motion. As millennials and Generation Z gain more economic and political power, and the unstoppable growth of EVs continues, expect a further shift toward a “green” economy.
With these factors more than countering its tempting dividend and record low prices, the answer’s clear: stay away from XOM stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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