An industry leader in returns, financial strength and management, Exxon Mobil Corp.’s five-year volume growth at 5% will exceed investors’ 2-3% expectations, but growth acceleration likely will not be visible until 2005, JP Morgan said in a new research report, which lowered the Irving, TX-based major’s rating to “neutral” from “overweight” on Wednesday.

The dropped rating partially followed Exxon’s announcement that it will acquire a significant stake in Russia’s energy concern Yukos-Sibneft. However, JP Morgan said that was only one of the factors. Also contributing to the lowered rating was the analyst’s belief that Exxon is less likely to raise its dividend significantly this year, as well as its recent outperformance overall.

“Previously, we felt there was good potential for Exxon to boost the dividend by 20-30% on or around Oct. 29, in response to the cut in the tax rate on dividends,” analysts said. Exxon will announce 3Q earnings Oct. 30. However, “management has indicated it is happy with the current balance of share repurchases ($7 billion annually) and dividends ($6.5 billion annually).” Analysts also believe Exxon needs to keep its cash to complete the Yukos deal. “We now expect the next dividend increase will be some 3-7% and will occur in 1Q or 2Q of 2004.”

At the end of the second quarter, Exxon had $12.5 billion of cash on hand against $10.1 billion in debt. It raised its dividend on common stock to 25 cents from 23 cents in April, however, it reserved a large portion of cash to buy back shares. In the first six months, Exxon repurchased $2.4 billion worth of stock and plans to continue buying back $1.5 billion in shares every quarter.

Analysts noted that Exxon’s share price is up 9% since July 31, outperforming other majors and the Standard & Poor’s 500 Index by 4%. “As a result, valuation has re-stretched somewhat, likely limiting potential outperformance from here.” The JP Morgan report noted that “as a defensive story, Exxon generally underperforms the broad market when it is rallying, especially when there is rotation from energy names into the technology sector, a pattern we’ve seen quite a bit this year. Conversely, if the broad market were to see a major correction, Exxon would likely outperform given its defensive characteristics.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.