ExxonMobil (NYSE:XOM) announced very satisfactory second-quarter results on July 30, but the shareholders seem to want more. The problem is the company is doing exactly what it should do with its cash flow. It’s covering its very ample dividend, paying down debt, and paying for necessary capital expenditures. In short, XOM stock is still very undervalued, as I wrote last month.

Seeking Alpha wrote that Exxon’s “stellar Q2 [was] overshadowed by lack of buybacks.” The article pointed out that other energy companies were now restarting their share buyback programs. Morningstar had the same sort of disapproving title: “Exxon Improves Cash Flow and Reduces Debt, but Increased Shareholder Returns Still on Hold.”

But to its credit, Exxon never cut its dividend during the Covid-19 crisis. It was one of the few companies that stayed the course in this regard for shareholders.

As a result, XOM stock now represents very good value for these shareholders. It has a 5.9% dividend yield, based on its annual $3.48 per share dividend (based on its price on July 30 of $57.57). Let’s look at this further.

Stellar Q2 Results Led To Huge Cash Flow

Page 12 of the company’s slide deck pretty much shows exactly what Exxon did with its cash flow during Q2. As many of you know who read my articles, I like to focus on a company’s free cash flow. That is what this slide shows.

The second line at the top of the page shows that Exxon made significantly higher earnings this quarter than last year. Net income was $4.7 billion compared to $2.7 billion last year.

But, of course, earnings are not cash flow. You have to add back non-cash items and uses of cash from working capital to derive its cash flow. That is what the blue line shows that says Cash Flow from Operating Activities (CFFO). Now it shows that in Q2 2021 the company made $9.7 billion in CFFO. That was only slightly over its $9.3 billion in CFFO last year.

But you know what, that mediocre growth doesn’t matter. What is important is how the company spent its operating cash flow. After assets sales, Exxon had $9.9 billion in operating cash flow to work with. The next three lines show how it spent that cash flow.

For example, $3.7 billion was used for dividends, $3 billion on capex, and $3.3 billion on debt reduction. That adds up to $10 billion, or about the same as its CFFO after asset sales.

In other words, Exxon is operating on a very safe budget. It’s slowly reducing its $60 billion in debt, paying for dividends and capex, and not drawing down its cash balance. This is very safe indeed — exactly what shareholders should want.

What To Do With XOM Stock

Don’t listen to critics of the company who say it should be doing buybacks. It simply can’t afford to do this now, without increasing its long-term debt. You can clearly see this in the deck on page 12, as I showed above.

But more importantly, as Seeking Alpha reports, Exxon has had an average 5.54% dividend yield over the past four years. Here is what that implies. If we divide its annual dividend of $3.48 per share by 5.54% the target price is $62.81 per share. That implies that XOM stock should trade about 9.1% higher than Friday’s close of $57.57.

However, here is another historical metric. Seeking Alpha reports that Exxon sports a forward P/E ratio (price-to-earnings) of 13 times for 2021 and 12.2 for 2022. But Morningstar has a table that shows that the company’s historical forward P/E ratio is 21 times. In other words, XOM stock should be trading 59% higher (i.e., 21x / 13.2x).

Therefore, if we average these two methods —  the 10% upside from its historical yield and the 59% upside from historical P/E ratios — XOM stock should be 34.5% higher. That implies it should be trading for $77.43.  So, look for XOM stock to move at least 35% higher from here.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.