XOM Dividend Analysis

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. It also engages in the manufacture of petroleum products, and transportation and sale of crude oil, natural gas, and petroleum products.
The company is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 25 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 14.30 % to its shareholders.

At the same time company has managed to deliver an impressive 21% average annual increase in its EPS since 1998 both through organic growth and share buybacks. Currently, the number of shares is lower than the number of shares at the time of the merger between Exxon and Mobil. The tremendous increase in commodities prices over the past decade has greatly contributed to the strength in financials..

The ROE has increased from 15% in the late 1990’s to over 33% currently.

XOM has continuously paid dividends without interruption or dividend cuts since 1911. Annual dividend payments have increased over the past 10 years by an average of 5.4% annually, which is significantly lower than the growth in EPS. A 5% growth in dividends translates into the dividend payment doubling almost every 13 years. If we look at historical data, going as far back as 1963, XOM has actually managed to double its dividend payment every eleven years on average.

If we invested $100,000 in XOM on December 31, 1997 we would have bought 3269 shares (Adjusted for two 2:1 stock split in July 2001). In February 1998 your quarterly dividend income would have been $670. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1419 by November 2007. For a period of 10 years, your quarterly dividend income has increased by 71 %. If you reinvested it though, your quarterly dividend income would have increased by 112%.

The dividend payout has declined from a high of low 73% in 1999 to a low of low 19% by 2007 A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The company has returned money to shareholders exclusively through share buybacks, which are typically not as consistent as increases in dividends.

Despite the low DPR and low P/E ratio, I would need a dividend yield of at least 2% to initiate a position in XOM. I would appreciate it greatly if the company increases its payout of dividends over time at the expense of reducing its massive share buybacks. XOM has the potential to achieve an above average dividend growth over the next decade if oil prices remain high.

Disclosure: I do not own shares of XOM.

Relevant Articles:

- APD Dividend Analysis
- USB Dividend Analysis

- GWW Dividend Analysis

- Emerson Electric (EMR) Dividend Analysis

If you like this post, buy me a beer!

Exxon Mobil’s Stingy Dividend Payout

Exxon Mobil (XOM) is one of the largest oil companies in the world. Its roots could be traced to Standard Oil, which was broken into several separate companies in 1911. Eventually two of those companies merged in 1999 to form Exxon Mobil. The company has benefited tremendously over the past decade, as the price of oil has increased over 8 times since 1999. This dividend aristocrat has paid dividends since 1911 and has consistently raised them for 28 years in a row. Despite the fact that many believe so called alternative energy sources would replace fossil fuels in the future, oil and gas would still be around at least for the next few decades. As a result investing in oil companies makes sense for income investors. Check my analysis of the stock.

The largest oil companies in the world include Exxon Mobil (XOM), Royal Dutch (RDS-B), Chevron (CVX), Total (TOT), Conoco Phillips( COP), and British Petroleum (BP).







(Source: Yahoo Finance from Aug 16, 2010)


Of all oil companies, Exxon Mobil has the lowest yield and one of the lowest dividend payouts. BP had a higher dividend payout and a higher dividend yield before it cut dividends this year. Exxon seems to be plowing most of its earnings into stock buybacks. Historically share buybacks have not been one of the smartest ways for management to allocate cash, as most buybacks occur when the price of the underlying is at its highest.

For example General Electric (GE) repurchased stock worth billions of dollars when the price was above $30, only to sell it back at $22 during the global financial crisis of 2007-2009. Exxon has been raising dividends, but the disproportionate amount of share buybacks to dividends suggests that management is not certain about the future profitability of the company. If they believed that oil prices would stay higher over the next few decades, this would mean that earnings per share could only go higher from here. This would support a higher dividend than the one we have today. Of course if oil prices plunge below $50 and stay there, then profitability would suffer and if dividends are too high, they might be cut. This could lead to angry shareholders and depressed stock price for some time. With buybacks however this could all be avoided, since they could be canceled at any time, without much publicity.

Other than that, Exxon Mobil (XOM) could afford to be more generous with shareholders, and raise dividends at a pace that is higher than the 5% annual dividend growth it has delivered over the past decade. That being said, Exxon Mobil (XOM) does appear to be attractively valued, as it could deliver not only decent dividend growth but solid price returns as well. Other oil companies which have stable and growing dividend payments include:

Chevron Corporation (CVX) operates as an integrated energy company worldwide. Chevron Corporation is a component of the S&P 500 and Dow Jones Industrials Indexes. The company is also a dividend achiever, which has consistently raised its dividends for 23 years in a row. Chevron trades at a P/E of 9.30, yields 3.70% and has an adequately covered dividend payment. (analysis)

Royal Dutch Shell Plc (RDS.B) operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. Royal Dutch Shell has managed to boost distributions at least since 1993. Currently the company is trading at a P/E of 11.10 and yields 6.30%. (analysis)

ConocoPhillips operates as an integrated energy company worldwide. It operates through six segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), LUKOIL Investment, Chemicals, and Emerging Businesses. ConocoPhillips has raised dividends for ten years in a row. Currently the company is trading at a P/E of 8.90 and yields 4%.

Full Disclosure: Long CVX RDS.B and XOM

Relevant Articles:

- Three Dividend Stocks to Capitalize on BP’s weakness
- Chevron Corporation (CVX) Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
- Dividends versus Share Buybacks/Stock repurchases

Exxon Mobil (XOM) Dividend Stock Analysis

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is a component of the S&P 500, Dow Jones Industrials and the Dividend Aristocrats indexes. Exxon Mobil has been consistently increasing its dividends for 28 years in a row.

Over the past decade this dividend stock has delivered an annual average total return of 8% to its shareholders.

At the same time company has managed to deliver a 6.40% average annual increase in its EPS since 2000. The forecasts for the foreseeable future are for a 45% increase in the EPS in 2010 to $5.80/share, followed by an increase in EPS to a $7.27 by 2011. The sheer scale of the company gives it huge economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US. The company has over 130 projects worldwide whose goal is to increase reserves of oil and natural gas. The company’s future acquisition of XTO Energy will boost natural gas production by over a quarter. XTO’s resources are close to the markets it serves. In addition to that technical expertise from XTO energy could assist Exxon Mobil in developing new shale fields worldwide.

The ROE had consistently increased from less than 15% in 2002 to over 38% in 2008, before dipping back to 17.30% last year on lower profitability.

Annual dividend payments have increased by an average of 7.30% annually since 2000, which is higher than the growth in EPS. Currently, the number of shares is lower than the number of shares at the time of the merger between Exxon and Mobil. The tremendous increase in commodities prices over the past decade has greatly contributed to the strength in earnings per share. A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1970, XOM has indeed managed to double its dividend payment every ten years on average. Just a few days ago Exxon boosted its dividend by 4.80% for the 28th year in a row.

The dividend payout has declined from a high of 57% in 2002 to a low of 17.8% in 2008., before increasing to 41.70% last year. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The company has returned money to shareholders exclusively through share buybacks, which are typically not as consistent as increases in dividends.

Overall Exxon-Mobil has low dividend payout ratio and a low P/E ratio of 14. In addition to that the stock yields 2.80%. I would appreciate it greatly if the company increases its payout of dividends over time at the expense of reducing its massive share buybacks. XOM has the potential to achieve an above average dividend growth over the next decade if oil prices increase over the next few year.In comparison Chevron Corporation (CVX) trades at a P/E multiple of 11 and yields 3.70%, while British Petroleum (BP) trades at a P/E multiple 8 while yielding 7.40%. I would consider adding to my position in Exxon Mobil as long as the stock is below $70.

Full Disclosure: Long BP, CVX and XOM

Relevant Articles:

- Chevron Corporation (CVX) Dividend Stock Analysis

- A record 22 companies boost dividend payouts

- Seven dividend aristocrats that Buffett owns

- Best Dividends Stocks for the Long Run

Exxon Mobil (XOM) Dividend Stock Analysis

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is a component of the S&P 500, Dow Jones Industrials and the Dividend Aristocrats indexes. Exxon Mobil has been consistently increasing its dividends for 27 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 10.50% to its shareholders.

At the same time company has managed to deliver an impressive 25.40% average annual increase in its EPS since 1999. The forecasts for the foreseeable future are for a 40% -50% contraction in the EPS in 2009 followed by an increase in EPS to a $6 to $6.50 range in 2010. The sheer scale of the company gives it economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US.

The ROE has consistently increased from less than 13% in 1999 to over 38% in 2008.

Annual dividends have increased by an average of 7% annually since 1999, which is much lower than the growth in EPS. Currently, the number of shares is lower than the number of shares at the time of the merger between Exxon and Mobil. The tremendous increase in commodities prices over the past decade has greatly contributed to the strength in earnings per share. A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1963, XOM has actually managed to double its dividend payment every eleven years on average. Just a few days ago Exxon boosted its dividend by 5% for the 27th year in a row. The dividend is very well covered at the moment.

The dividend payout has declined from a high of 74% in 1999 to a low of 18% by 2008. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The company has returned money to shareholders exclusively through share buybacks, which are typically not as consistent as increases in dividends.

Despite the low dividend payout ratio and low P/E ratio, I would need a dividend yield of at least 3% to initiate a position in XOM. I would appreciate it greatly if the company increases its payout of dividends over time at the expense of reducing its massive share buybacks. XOM has the potential to achieve an above average dividend growth over the next decade if oil prices increase over the next few year.

In comparison Chevron Corporation (CVX) trades at a P/E multiple of 5.60 and yields 4.00%, while British Petroleum (BP) trades at a P/E multiple 5 while yielding 8.40%.
I would consider initiating a position in Exxon Mobil on dips below $56.

Full Disclosure: None

Relevant Articles:

- Best Dividends Stocks for the Long Run
- United Technologies (UTX) Dividend Stock Analysis
- 3M (MMM) Dividend Stock Analysis
- McDonald’s (MCD) Dividend Stock Analysis

Three Dividend Stocks to Capitalize on BP’s weakness

The woes of BP’s oil spill are making national headlines these days. After several unsuccessful attempts at capping the oil spill, British Petroleum (BP) is still unable to stop the oil from flowing in the water. With liabilities expected to reach several billion dollars, investors have been selling off BP’s stock, which has caused it to decline over 30% from its highs in April. Many investors are now wondering whether now is the time to capitalize on the weakness in BP’s stock price and purchase the stock at a discount.

On the positive side, the company earned $16.5 billion in 2009, or $5.28/share. It earned $1.92/share in the first quarter of 2010, which was more than enough to cover its quarterly dividend of $0.84/share. With a dividend yield of 9% and a Price/Earnings ratio of 6, the company definitely looks attractive. The main issue here is the total liabilities that the company would have to incur in order to clean up the mess from the oil spill. If hurricane season is especially intense this year, the environment of the whole Gulf of Mexico region could be severely affected. This could make it very expensive to clean up the oil spill mess. With all the uncertainty around, analysts are forecasting either the implosion of the company or a takeover of BP. Given the company’s strong cash flow generation however, BP should be able to shoulder the costs financially. The main problem is the damage to its reputation.

At the same time other quality oil companies have gone down in tandem with BP, falling oil prices and falling equity indices worldwide. If investors are not willing to take the company specific risk of BP, they could look elsewhere to purchase quality oil companies at a discount. Three dividend growth oil stocks which look attractively priced at the moment include Chevron (CVX), Exxon Mobil (XOM) and Royal Dutch Shell (RDS-B).

Exxon Mobil Corporation (XOM) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. This dividend aristocrat has raised dividends for 28 consecutive years. The stock yields 2.90% and trades at a P/E of 14. (analysis)

Chevron Corporation (CVX) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. This dividend achiever has managed to boost distributions for 23 consecutive years. The stock trades at a P/E of 11 and yields 3.90%.(analysis)

Royal Dutch Shell (RDS.B) is engaged worldwide in the aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. This dividend stock has raised distributions since 1993. The stock yields 6.40% and trades at a P/E of 11. (analysis)

For enterprising investors looking for a bargain, BP stock might look like the ultimate value play. That being said, investors should do well over time with a lower amount of risk by allocating their capital to other oil companies. My personal favorite is Chevron (CVX), with its adequately covered dividend payment, above average yield and low price/earnings ratio of 11. I also like the dividend growth prospects of Chevron as well, which makes it my top oil pick.

Full Disclosure: Long BP, CVX, RDS.B and XOM

Relevant Articles:

- Chevron Corporation (CVX) Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
- Chevron (CVX) Raises Dividends; MLPs follow suit
- Royal Dutch Shell Stock Analysis

Are Dividend Investors Benefiting from Stock Buybacks?

Corporations typically return cash to shareholders in two ways – through share buybacks or in the form of dividends. In a previous article I compared and contrasted both methods of returning cash to shareholders.

My analysis of Chubb (CB) spurred a lively discussion among readers, some of which use Net Payout Yield. The net payout yield represents the total amount of cash paid for dividends and spent on share buybacks, divided by the market value of the company. Some investors believe that this should be taken in consideration, whenever someone analyses a stock.

Rather than take these readers words for it, I decided to crunch some numbers. I noted that Chubb (CB) has spent the following amounts for share repurchases over the past 4 years: ( in millions of $)



The most interesting part in this exercise is that the highest price for Chubb stock was $66 reached in 2011. Before that, the highest price was in 2008 at $65. What the company is not showing is that it is repurchasing shares, yet it is also issuing shares most probably to executives who have chosen to exercise their stock options at ridiculously low prices.

The company has spent $1.88 billion on dividends over the past 4 years. However, it has spent $6.24 billion on share repurchases. It spent 3.30 times more on buybacks than on dividends.

An investor with 4.23 million shares in 2006 would have owned 1% of the entity, whereas now they would own 1.30% because of the anti0dillutive effect of share repurchases. However the stock ended 2006 at $53. Had all the cash been paid out as dividends, the investor would have received $19 in dividends/share over a 4 year period (for a 36% return). ( I get to $19 by adding up 1,881 billion spent for dividends and the 6,237 billion spent for buybacks and assuming the number of shares stayed constant, and then dividing by 423 million shares).

Instead, the investor received $5.36 in dividends in total for 2007, 2008, 2009, and 2010. The stock closed 2010 at $60. So the total return was 23%.

I also analyzed three of the largest dividend paying stocks, which repurchased massive amounts of stock over the past several years. The companies include Wal-Mart (WMT), Exxon-Mobil (XOM) and IBM (IBM).

ExxonMobil (XOM) shareholders would have received $21.61/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 28.20% return). Instead, shareholders received a paltry $6.32/share over the 2007-2010 period. The stock closed 2006 at 76.63and traded at 11.60 times earnings. The stock closed 2010 at 73.12 and traded at 11.80 times earnings. The amounts paid per each repurchased share appear reasonable. The increase in share count in 2010 was prompted by the acquisition of XTO energy. Check my analysis of XOM.



Wal-Mart Stores (WMT) shareholders would have received $11.82/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 25.30% return). Instead, shareholders received a paltry $4.13/share over the 2007-2010 period. The stock closed 2006 at 46.18 and traded at 17.40 times earnings. The stock closed 2010 at 53.93 and traded at 12.90 times earnings. When looking at the amount paid per share over the past 4 years, investors should remember that the stock price never went above $63 during our study period. While the share buybacks might not have been beneficial to ordinary WalMart (WMT) shareholders, they have been helpful for the Walton family. The Walton family stake in Wal-Mart has increased to above 50%, mainly due to the fact that the family is holding on to their stock, while the company is using shareholder’s cash to repurchase stock held by others. Check my analysis of WMT.



It seems that IBM (IBM) shareholders would have received $40.53/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 41.70% return). Instead, shareholders received a paltry $8.05/share over the 2007-2010 period. The stock closed 2006 at 97.15 and traded at 16 times earnings. The stock closed 2010 at 146.76 and traded at 12.70 times earnings. The amounts paid per each repurchased share look particularly out of line, given the fact that IBM never traded above $150 until early 2011. Check my analysis of IBM.



Of course, over the long term, (after 10-20 years), the price of each of the stocks mentioned above would be much higher than what it trades for today. As a result, the partners in the business who sold below at current prices would be kicking themselves for their sell decisions between 2007 -2010. However, the partners in the business who held on to their investment would have seen this share repurchase as a smart option.

To summarize however, I would much rather receive special dividends, than get share buybacks.

Full Disclosure: Long CB, WMT, XOM

Relevant Articles:

- Chubb (CB) Dividend Stock Analysis 2011

- Dividends versus Share Buybacks/Stock repurchases

- Wal-Mart (WMT) Dividend Stock Analysis

- Special Dividends Unlock Hidden Value in Stocks

Are these oil dividends safe?

The price of oil has declined a lot since the summer of 2014. The West Texas Intermediate (WTI) in Cushing, Oklahoma has declined from a high of $107.52/barrel in June 2014 to a low of $45.25/barrel in August 2015. This severe decline in prices has reduced the earnings power of many energy dividend growth stocks, which are engaged in exploration and production.

The question on everyone’s mind is whether these dividends are safe. Only after we answer this question, can we determine whether it makes sense to purchase those shares for income in a dividend growth portfolio.

Back in late 2014, I discussed whether the oil price decline was the opportunity of a lifetime. I talked about three companies I had my eye on. Initially, I discussed how I wanted to slowly build my positions every month. I even made a purchase of ConocoPhillips in early 2015, followed by a small purchase of Exxon Mobil (XOM) a few later. As I was buying Exxon Mobil, I had a change of heart after realizing that the oil price shock had drastically reduced energy companies’ earnings a few weeks later. Therefore, the drop in share prices was much lower than the decline in earnings power, which made those shares overvalued. As a result, I changed course and only recently bought shares in Exxon Mobil.

Chevron Corporation (CVX) Dividend Stock Analysis

Chevron Corporation operates as an integrated energy company worldwide. The company’s organized into several segments including Petroleum operations, chemical operations coal mining, power generation, insurance, and real estate activities.

Chevron is a dividend achiever as well as a component of the S&P 500 and Dow Jones Industrials indexes. It has been increasing its dividends for the past 20 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 11.10 % to its shareholders. The stock has lost about four percent of its value so far in 2008.

At the same time company has managed to deliver a 27.00% average annual increase in its EPS since 1999, supported by the commodities bull market of the past decade.

The ROE fluctuated between 5% and 35%. The past couple of years have been characterized by higher returns on equity.

Annual dividend payments have increased over the past 10 years by an average of 7.10% annually, which is much lower than the growth in EPS. Using the rule of 72 a 7% growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1988, CVX has indeed managed to double its dividend payment every ten years on average.

It’s interesting to note that both XOM and CVX have not kept pace with the EPS increases by raising their dividends accordingly. Instead those oil behemoths have decided to make stock buybacks, which are not as reliable as dividend payments over the long run. I think that CVX and XOM management probably have not increased dividends as fast as earnings because they consider the current commodities boom to be of short term nature.

If we invested $100,000 in CVX on December 31, 1998 we would have been able to purchase 2411 shares (Adjusted for a 2:1 stock split in 2004). In February 1999 your quarterly dividend income would have been $735. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $2115 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 113%. If you reinvested it though, your quarterly dividend income would have increased by 188%.

The dividend payout has remained below 50% after 2003. Before that the payout had followed the wide fluctuations in earnings rising above 100% on several occasions. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

CVX does look attractively valued with its low price/earnings multiple of 9, low DPR as well as attractive yield at 3%. If I had to choose between XOM and CVX, the latter would be the obvious candidate for me. I will look forward to entering a position into this stock on dips.

Disclosure: I do not own shares of CVX

Relevant Articles:

- BP (BP) Stock Dividend Analysis

- XOM Dividend Analysis

- Emerson Electric (EMR) Dividend Analysis

- Wal-Mart Dividend Analysis

- Free Magazines

Dividends versus Share Buybacks/Stock repurchases

Companies have several means through which they share their prosperity with shareholders. Dividends are the portion of corporate profits paid out to stockholders in the form of cash. Share buybacks on the other hand represent cash distributed to existing shareholders in exchange for a fraction of the company’s outstanding equity. While both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.

Share Repurchases have gained popularity among companies because there's a total flexibility with them, whereas dividend payments require a commitment. With repurchases a company could spend billions buying back its stock in one year, and then spend nothing for the next few years. With dividends however a company that cuts, eliminates or suspends its payment would likely enrage shareholders.

Some investors believe that stock buybacks are the most tax efficient way for companies to return cash to shareholders. Currently, the highest tax on qualified dividend income is 15% for the top income tax bracket. When companies earn money, they pay taxes on it. When companies pay dividends, dividends are taxed again at the individual level.

When companies repurchase their own shares, they decrease the number of outstanding stock available, which theoretically increases the stock value. Some investors consider this to be the most tax efficient method of returning cash to shareholders, since there is no tax on repurchasing shares. These investors seem to forget however that the holders of stock who sold to the company end up paying a capital gains tax on their profit. While not all shareholders sell stocks to companies, which are repurchasing their own stock, the ones that do could end up with a higher tax bill at the end of the day, especially if they were long-term buy and hold investors.

One reason for the increased popularity of buybacks is that companies do not wish to commit to a certain dividend level, since their earnings are volatile. Stocks like Exxon Mobil (XOM) didn’t pay a large dividend during the huge run up in oil prices over the past decade, partly because their executives might have believed that once oil prices stabilized, dividends would have had to been cut in order to account for the new reality. It looks like Exxon Mobil (XOM) managers were correct about using caution in expecting the good times to continue indefinitely. Projections for near term earnings per share are to contract by 50% in 2009 before recovering to only two-thirds of the record earnings numbers from 2008. Check my analysis of Exxon Mobil (XOM)

Some analysts believe that companies use share buybacks as a clever way to offset shareholder dilution from exercised stock options from management. With stock repurchases companies fail to reduce share count due to new issuance of stock to redeem employee stock options. Stock buybacks are typically initiated in good times, when stock prices are high and discontinued in bad times, when stock prices are low, Thus, corporations end up purchasing their own stock at inflated prices, which greatly limits the supposed benefits of increasing the ownership percentage of each share owned by stockholders.

General Electric (GE) is a prime example for this. In 2007 the company spend $12.319 billion buying back stock, which reduced the share count from 10394 million to 10218 million, or a decrease of 176 million shares. This comes out to $70/share, whereas the high and low prices of GE stock in 2007 were $42.15 and $34.50 respectively. This sure tells us that the company gave out at least one hundred million shares through option exercises. Facing a liquidity crunch in 2008 the company was forced to sell $12 billion worth of stock at $22.25/share, much lower than the price is had paid for buybacks over the past 4 years. Back in February 2009, the company cut its dividend as well in order to conserve cash.

IBM is another interesting buyback stock to research further. Over the past decade, the worldwide supplier of advanced information processing technology and communication systems and services and program products has managed to decrease the number of shares outstanding from 1.852 billion at the end of 1998 to 1.339 billion by 2008. At the same time revenues have increased by 18.4% from $87.548 billion to $103.63 billion over the past decade. Earnings per share increased by 116.75% from $4.12 to $8.93, mainly due to share buybacks, since net income only rose by 60.4% from $7.692 billion to $12.334 billion in the process. $100 invested in IBM stock at the end of 1998 would now be worth $130.30 with dividends reinvested, and only $117.4 without reinvestment. Dividend payments increased from 0.11/share in 1998, when the yield was a little less than 0.5% to $0.55/share, for a yield of less than 2.1%.

The company has spent $73 billion on share buybacks, which should have been paid out as special dividends instead. This would have increased the total returns for shareholders by rewarding them with a higher dividend payment, the compounding effects of which could have greatly magnified long-term stockholder returns. I am a supporter of the extra cash being paid out as a dividend, since its contribution to the total returns would have been more visible than share buybacks. Check my analysis of International Business Machines (IBM).


Dividends on the other hand are mostly cash in hand that gives the investors options about their further allocation. They could be spent, re-invested in the same or other stocks or could be placed in a savings account. Dividends are somewhat more predictable and reliable sources of income, especially if you are looking for an alternative income stream in retirement.

Dividends have contributed a large portion of total returns to shareholders. They typically account for 40% of average annual total returns each year and are the only form of returns on investment that shareholders achieve during bear markets. The reinvestment of dividends has accounted for majority of S&P 500 total returns as well over the past century.

Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.

It would be much easier for an individual who plans on living off their investments to rely solely on dividends that on hoping that share buybacks would lift the value of his or her stocks. Selling your stocks at the midst of a bear market in order to sustain your lifestyle doesn’t make much sense, yet investors keep cheering the supposed “tax efficiency” of stock buybacks.

I typically treat share repurchases the same way as special dividends. Share buybacks are inferior to dividend payments, as they could be canceled or temporary suspended at any moment, without many investors noticing this. Dividend payments on the other hand are visible to shareholders and cutting or eliminating a payment would certainly create negative publicity for the company. I would much rather see special dividends, rather than stock buybacks, which are a clever way to mask the diluting effect of employee option being exercised.

Full Disclosure: None

Relevant Articles:

- Special Dividends Unlock Hidden Value in Stocks
- Dividends and Stock Buybacks in the news
- Dividend Investing vs Trading
- IBM Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis

Chevron Corporation (CVX) Dividend Stock Analysis

This article originally appeared on The DIV-Net one week ago.

Chevron Corporation operates as an integrated energy company worldwide. Chevron Corporation is a component of the S&P 500 and Dow Jones Industrials Indexes. The company is also a dividend achiever, which has been consistently increasing its dividends for 21 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 9.40% to its shareholders.

At the same time company has managed to deliver an impressive 25% average annual increase in its EPS since 1999. The increase in prices of crude oil and natural gas definitely helped with earnings. The rapid fall of energy prices in late 2008 and early 2009 and weak global demand could lead to lower earnings per share in 2009 to $4.70/share according to some analysts. After that expectations are for a recovery in earnings to at least $7/share.
Any analysis of earnings trends for an oil and gas producer such as Chevron would definitely depend of the future prices of energy commodities over the next few years. Nevertheless the dividend is sustainable at current levels and there definitely is some room for dividend growth in 2009 and 2010.

The ROE has consistently remained above 20% since 2003 after earlier volatility in this indicator in the early 2000s.

Annual dividends have increased by an average of 8.30% annually since 1999, which is lower than the growth in EPS. On the other hand however Chevron has been rewarding stockholders with share buybacks as well.
An 8 % growth in dividends translates into the dividend payment doubling almost every nine years. Since 1988 Chevron Corporation has actually managed to double its dividend payment almost every ten years on average.

The dividend payout has largely remained above 50% after 2003. Before that it did shoot up above 50% in 1999, 2000 and 2002. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Chevron Corporation is trading at a P/E of 5.60, yields 4.00% and has an adequately covered dividend payment. The forward P/E for 2009 earnings is close to 14. In comparison Exxon Mobil (XOM) trades at a P/E multiple of 8 and yields 2.40%, while British Petroleum (BP) trades at a P/E multiple 5 while yielding 8.40%.
I find Chevron attractively valued at current levels given its stable dividend growth history. If you are looking to add exposure to the energy sector for your dividend portfolio then CVX could just be the right stock for you.

Full Disclosure: Long CVX and XOM

Relevant Articles:

- XOM Dividend Analysis

- Why do I like The Dividend Achievers

- BP (BP) Stock Dividend Analysis

- Best Dividends Stocks for the Long Run

Four Dividend Stocks safer than US Treasuries

Over the past few weeks, financial markets have gotten concerned about the possibility that US congress would not raise the debt ceiling on US government debt. The implications range from credit downgrades on US Treasuries to de facto default by the US government if it chooses to delay payment of Social Security Benefits. Currently, US Treasuries are rated AAA, and are regarded as the safest investment instrument in the world. As a result, institutions and foreign governments hold trillions of dollars of this highly liquid and safe investment. The high budget deficits as well as the high level of US government debt however, have some experts doubting whether the status quo of US Treasuries as “safe investments” will change.

So if investors doubt the safety of an instrument rated AAA by credit agencies, what alternatives do investors looking for AAA safe investments currently have? I did a little research and found several dividend growth stocks, which have global operations that currently spot AAA ratings.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is a member of the dividend aristocrats index, and has increased dividends for 49 years in a row. Over the past decade, Johnson & Johnson has raised annual distributions at 13% per year. Yield: 3.40% (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend aristocrat has increased dividends for 29 years in a row. Over the past decade, Exxon Mobil has raised annual distributions at 7.10% per year. Yield: 2.30% (analysis)

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. The company is a member of the dividend aristocrats index, and has increased dividends for 36 years in a row. Over the past decade, ADP has raised annual distributions at 14.50% per year. Yield: 2.70% (analysis)

Microsoft Corporation (MSFT) develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. The company has increased dividends for 6 years in a row. Over the past five years, Microsoft has raised annual distributions at 11.40% per year. Yield: 2.40% (analysis)

Generally, purchasing the stock of any of these four companies would likely provide investors with greater total returns over the next 5, 10 or 30 years. In addition, three of these companies have a history of growing dividends for several decades. As a result, investors in these companies can expect a rising dividend income stream, that would exceed inflation over time.

Full Disclosure: Long JNJ, ADP, XOM

Relevant Articles:

- Exxon Mobil (XOM) Dividend Stock Analysis

- Ten Dividend Stocks Beating Inflation

- Dividend Aristocrats list for 2011

- Reinvesting Dividends Pays Off

The Energy Company I want to buy

The other day, I posted an article which discussed a few investments I have recently made. I had previously bought some ConocoPhillips in early 2015, at which point forward earnings expectations hadn’t really gone as low as they are now. In previous research I had mentioned that I was looking to adding more to my positions in Exxon Mobil, ConocoPhillips and potentially even Chevron.

You might be surprised to see that I have not added to any of my energy holdings. The reality is that stock prices have not fallen as much as the price of oil, which reduced future earnings power.

Ticker	Price	Dividend	2015 EPS	Payout	P/E	Analysis
COP	62.98	$       2.92	$       1.59	184%	39.61	analysis of COP
CVX	102.53	$       4.28	$       4.73	90%	21.68	analysis of CVX
XOM	87.42	$       2.76	$       4.29	64%	20.38	analysis of XOM

Note: Data is as of Friday, Jan 30, 2015

The reduced prices on oil have resulted in lowering of the expected earnings for 2015 for ConocoPhillips (COP), ExxonMobil (XOM) and Chevron (CVX) of and $1.59, $4.29, $4.73. Since prices have fallen much less than earnings, those oil companies are now selling above 20 times expected earnings. In all three, the forward dividend payout ratios are very high.

I am well aware that cyclical companies appear cheapest at the top of the cycle when earnings are highest, and that they appear most expensive at the bottom of the cycle when earnings are lowest. However, I also want to knowingly avoid purchasing companies that cannot support their dividend out of expected earnings.

This essentially rules out further investment in ConocoPhillips for me, and potentially even Chevron which should sell below $95/share to enter value territory. For ExxonMobil, my ideal value price would be below $86/share. Given its low payout ratio, ExxonMobil looks like the ideal candidate to build out an energy position.

It also looks like many participants have not priced in low prices, and are acting as if low prices are a temporary event. In the case the drop is temporary, buying today makes a lot of sense. In case prices stay low for longer than expected however, share prices might reflect that new reality. Most importantly, shares in many companies seem slightly overvalued, despite going down in price. Of course, I am also well aware that I should not blindly look into next years earnings as well. As someone who plans on holding for 20 - 30 years, I expect that oil prices will recover at some point, which would result in higher earnings over time ( especially if production volumes increase). However, I also want to avoid situations where a short-term pain ( 1-2 years) causes a company to cut dividends - this would disqualify it right away for my strategy. As most of you are aware, my goal is to generate a defensible stream of dividend income, which grows above the rate of inflation. I am trying to avoid companies which might be prone to dividend cuts as much as possible.

ExxonMobil is the one oil company, where I want to build out a full position over time. I already own a lot of Chevron, which is one of the reasons why any additions there will be limited. Given the high payout ratio on ConocoPhillips, I might not be able to buy more however. When I am presented with new evidence, I believe that the smart thing to do is change my view and manage risk accordingly.

I did add to my ExxonMobil position early this week. I might take the plunge into more ExxonMobil sometime in March, especially if stock prices go lower from here.

Full Disclosure: Long all companies listed above

Relevant Articles:

- Margin of Safety in Dividends
- Not all P/E ratios are created equal
- Why do I use a P/E below 20 for valuation purposes?
- Are Energy Stock Values Today a Once in a Lifetime Opportunity?
- Are Energy Investments Today a Once in a Lifetime Opportunity (Part 2)

Exxon Mobil (XOM) Dividend Stock Analysis

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. Exxon Mobil is a component of the Dow Jones Industrials and the dividend aristocrats indexes. Exxon Mobil has paid uninterrupted dividends on its common stock since 1882 and increased payments to common shareholders every year for 28 years.

The most recent dividend increase was in April 2011, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Exxon Mobil include Chevron Corp (CVX), British Petroleum (BP) and Royal Dutch Shell (RDS-B).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.30% per year since 2001. Analysts expect Exxon-Mobil to earn $8.28 per share in 2011 and $8.85 per share in 2012. This would be a nice increase from the $6.22/share the company earned in 2010. On average the company has managed to repurchase 4.20% of its stock annually over the past decade. Exxon Mobil has one of the largest and most consistent stock buyback programs in the US.

The company has a strong reserve replacement ratio, which ensures it would not run out of oil. The sheer scale of the company gives it huge economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US. The company has over 130 projects worldwide whose goal is to increase reserves of oil and natural gas. The company’s future acquisition of XTO Energy will boost natural gas production by over a quarter. XTO’s resources are close to the markets it serves. In addition to that technical expertise from XTO energy could assist Exxon Mobil in developing new shale fields worldwide. Exxon has been accumulating natural gas assets, which could provide the company with long term dividends given the low prices of natural gas.

The return on equity closely followed the rise of oil prices up until 2008, the fall in 2008- 2009 and the subsequent increase ever since. Right now Exxon-Mobil has a high return on equity of 20%. Given the high oil prices, I expect ROE to reach its 2008 highs this year. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 7.40% per year since 2001, which is lower than the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1970, we see that Exxon Mobil has managed to double its dividend every ten and years on average.

Over the past decade the dividend payout ratio has generally followed a downward trend. This indicator spiked up on a few occasions mainly due to short term weakness in EPS caused by declines in oil and gas prices. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Exxon Mobil is trading at 11.50 times earnings, yields 2.30% and has a sustainable dividend payout. Despite rising oil prices, and the low P/E ratio, the company has a very stingy dividend payout in comparison to its peers. As a result, I would only consider adding to my position in the stock on dips below $75.

Full Disclosure: Long CVX, XOM, RDS-B

Relevant Articles:

- Dividends versus Share Buybacks/Stock repurchases

- Exxon Mobil’s Stingy Dividend Payout

- Dividend Achievers Offer Income Growth and Capital appreciation

- Seven Dividend Aristocrats to buy on dips