The oil giant is poised to end 2020 in the crosshairs of an activist investor who is trying to line up major shareholders to urge Exxon (ticker: XOM) to focus on clean-energy investments and cutting costs to save its dividend.
For much of the year, as Exxon’s stock has slid lower and oil prices have convulsed, investors have worried the dividend wasn’t safe. Exxon’s dividend is $3.48, which equates to a 8.35% dividend yield—one of the highest among blue-chip stocks.
The Wall Street Journal reported that Engine No. 1, an investment firm, is planning to send Exxon’s board of directors a letter urging some hard shifts. The California State Teachers’ Retirement Systems, which owns more than $300 million of Exxon stock, apparently supports the activist investment firm.
The thing about activist investing is that it takes time—and it is difficult. Simply getting institutional investors to support a reform agenda that could boost the stock price is probably the easy part. Convincing a powerful company to change how it has long operated is a different matter.
Moreover, most major corporate boards tend to be populated with former heads of major companies who may sympathize more with the pressures of an embattled fellow chief executive than with the agenda of an activist investor. Besides, Exxon has recently begun to manage its affairs by reducing spending and doing what it can to preserve the dividend.
Still, the challenge to Exxon should be viewed as a milestone in a very difficult year. Exxon’s stock is down 40% both in 2020 and over the past 52 weeks, when the stock has ranged from $30.11 to $71.37. The
is up 14% this year.
Investors could simply trade off the back of the news flow and buy the battered stock and its attractive dividend, and tuck it into that portion of their portfolio that is earmarked for risky, potentially high-return trades. Lots of investors do this with a fraction on their portfolios.
But an option-centric approach merits consideration.
Rather than buying, say, 1,000 shares of stock, investors could buy 500 shares and sell five put options, which give the buyer the right to sell an underlying security at a specified price and time. If the stock keeps rising, investors keep the money received for selling the put. Should the stock decline below the short put strike price—and it was lower Monday despite the activist news—investors are positioned to buy the stock at a lower price.
With Exxon trading at around $42 on Tuesday morning, investors could buy the stock and sell the June $40 put for $4.10.
If the put expires without being exercised, the put seller would realize an 11.4% return on the money that was used to securitize the put. (The 11.4% return is determined by dividing the $4.10 put premium by $35.90, which is the effective stock purchase price, or $40 less $4.10).
The key risk, of course, is that Exxon’s stock plummets for whatever reason. Investors would then be stuck dealing with a very unpleasant problem. If the stock is at $30, for example, the put would be worth $10. Investors could either cover the put at the higher price, or just buy the stock at the higher strike price.
To be sure, there is risk in either approach to Exxon. The question is simply what kind of risk you are most comfortable with.