Monday, April 21, 2008

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.
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