Colgate-Palmolive Company (CL), Exxon Mobil Corporation (XOM): Wait for These Overpriced Dividend Stocks to Fall

The dividend has grown at an annualized rate of 9.3% over the past decade as earnings per share have more than tripled. There is, however, a big discrepancy between net income and free cash flow. Because Exxon Mobil Corporation (NYSE:XOM) has greatly increased its capital expenditures over the past few years, now more than double 2007 levels, the free cash flow is significantly less than the net income. So although in 2012 the payout ratio with respect to the net income was a lowly 22.5%, it was a much higher 46% of the free cash flow.

As it gets harder and more expensive to find new oil, reserves companies like Exxon Mobil Corporation (NYSE:XOM) will have to continue to spend more and more money in order to maintain their production. I don’t see any real reason for the capital expenditures to fall anytime soon, so it seems that free cash flow is far more important here than net income. A payout ratio of 46% isn’t too high, and the company spends much more on buybacks which will keep the payout ratio in check. In the last ten years the share count has been reduced by 30%.