Friday, December 5, 2014

Exxon Mobil (XOM) Dividend Stock Analysis

Exxon Mobil Corporation (XOM) explores and produces for crude oil and natural gas. This dividend champion has paid dividends since 1911 and managed to increase them for 32 years in a row. One of the largest holders of Exxon Mobil is Warren Buffett, who recently bought the stock through his holding company Berkshire Hathaway.

The most recent dividend increase was in April 2014, when the Board of Directors approved a 9.50% increase in the quarterly dividend to 69 cents/share.

The company's largest competitors include Chevron (CVX), British Petroleum (BP), and Total (TOT).

Over the past decade, this dividend growth stock has delivered an annualized total return of 10.30% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.


The company has managed to deliver a 8.90% average increase in annual EPS over the past decade. Exxon Mobil is expected to earn $7.73 per share in 2014 and $7.75 per share in 2015. In comparison, the company earned $7.37/share in 2013. As an energy company, short-term fluctuations in earnings will be driven by short-term fluctuations in prices for oil and natural gas globally. This was evident by the decline in earnings per share during the financial crisis, when energy prices, as everyone is well aware, declined. Long-term growth in earnings per share will be largely driven by expectations for small growth in production, expectations for small growth in prices, and regular share buybacks (see more details below).


Between 2004 and 2014, the number of shares outstanding has decreased from 6.512 billion to 4.346 billion. The consistent decrease in shares outstanding adds an extra growth kick to earnings per share over time. Exxon Mobil has one of the most consistent share buyback programs in the US.

The thing about energy companies like Exxon Mobil is that in order to earn revenues in the future, they need to spend gobbs of money on new exploration projects throughout the world. Sometimes those places could turn out to be unprofitable, even if oil and gas are found, if the government in that country decides to be business-unfriendly through expropriation or imposing steep taxes. Finding oil and gas is difficult, costly and uncertain. However, if an oil company does not regularly replenish its reserves, they will run out of oil eventually and stop earning money to pay for those dividends. I believe that Exxon Mobil has been able to successfully replenish reserves in the past, which is a good indicator about the future. In addition, a company with a strong balance sheet like Exxon is one of the few that can have better odds at succeeding in exploring for oil and gas in difficult places around the world. Many of those projects might require steep amounts of capital and the type of expertise that companies like Exxon Mobil and the other oil majors can leverage together or separately.

When you buy an oil company like Exxon, you are betting that management will keep finding or acquiring enough in oil and gas to at least replace the amount that is pumped out from the ground, and more importantly, do so in a cost-effective way. Exxon Mobil management has been in the oil business for over a century, so I believe they have the culture in place to perpetuate the business for at least a few more decades. The management has been able to allocate capital very effectively, by allocating it only in projects with high return on investment (ROI) potential, and returning the rest to shareholders in the forms of dividends and share buybacks. Speaking of share buybacks, Exxon Mobil has been one of the most consistent repurchasers of shares in America. Its shares are routinely cheap, which makes buying back shares almost a no-brainer activity. The superb capital allocation of management, consistent share buybacks, and optimism about the rising need for oil and gas in the future are probably some of the reasons why Warren Buffett initiated a position in the company in 2013.

You are also making a bet that the world will keep its hunger for oil and gas in the future. Most projections I have seen go through the year 2030, and they forecast an increase in the need for oil and gas. Those projections also discuss the increased demand for energy globally, particularly driven by those emerging market economies that are trying to rapidly increase standards of living. The offset to that growth in energy demand will be the use of technology to make each drop of conventional energy do more and last longer. In other words, have cars that drive more than 30-40 miles to the gallon or using less energy to heat or cool homes, with the same overall impact. The forecasts are also for an increase in the share of renewable sources, such as wind, solar, geothermal etc. Those are intermittent sources of energy, which would grow, but not be as big a threat initially until a more advanced battery storing technology is introduced. The expectations are that traditional oil and gas energy sources will account for a lower percentage of overall energy needs of the world in the future. However, since the demand will be greater, this could still mean higher demand for traditional carbons like oil and gas.

Of course, it is also important to note that our civilization is based on carbons that companies like Exxon Mobil produce. This includes a wide range of items such as plastics, pharmaceuticals, synthetic materials. (Just for fun, check out this partial list of 144 items.) One of the competitive advantages of Exxon Mobil is actually its integrated model with refining and chemicals.

The annual dividend payment has increased by 9.60% per year over the past decade, which is higher than the growth in EPS. The growth in dividends will probably be limited to 7%/annually in the next decade, given the size of the company.


A 9% growth in distributions translates into the dividend payment doubling every eight years on average. If we check the dividend history going as far back as 1974, we could see that Exxon Mobil has managed to double dividends almost every five years on average.

In the past decade, the dividend payout ratio has increased from 27.30% in 2004 to 33.40% by 2014. The company has preferred share repurchases to paying dividends, although it has kept raising dividends at a very healthy clip. 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 return on equity has largely followed the ups and downs in the price of oil and natural gas over the past decade. I generally like seeing a high return on equity, which is also relatively stable over time. While Exxon Mobil sells a commodity product, its management has a good track record of capital allocation to projects that generate high returns, which is what probably attracted the Oracle of Omaha to the company.




Currently, Exxon Mobil is selling for 12.50 times forward earnings and yields 2.90%. I am slowly building my position in the company, and will likely do so over the next several years. I expect the stock to be mostly flat over the next few years, which would make accumulation easy. I expect to hold this company for the next 30 years, which is why I am willing to wait out a few cycles of boom and bust in commodity prices, or a period of potential flat production volumes. This is because I believe that the management team of Exxon Mobil can deliver solid long-term results for buy and hold investors.


Full Disclosure: Long XOM, CVX, BRK.B

Relevant Articles:

Why Warren Buffett purchased Exxon Mobil stock?
How to Generate Energy Dividends Despite the Peak Oil Non Sense
Has Charlie Munger gone senile on US Energy Independence?
Chevron Corporation (CVX): An Undervalued Dividend Star
Five Dividend Paying Companies with Consistent Share Buybacks

2 comments:

  1. Nice article. Good illustration of growing EPS through buybacks. One point that is rarely mentioned in energy company analyses is the dependence of petro chemicals in agriculture, especially for fertilizers. The growth in productivity of agriculture is linked to genetic engineering technology as well as more intensive use of fertilizers and other chemicals...much to the dismay of the green crowd. As the world's population and affluence continues to grow, so will the demand for agricultural commodities.

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  2. It's interesting to see how CVX and XOM are the only true big dividend oil stocks, that are true to their income seeking investors even now in 2016, where oil prices have plummeted. I guess that BP would fit this description as well, but their payout ratio is far too risky.

    Here is some interesting dividend data for Exxon:
    https://dividendplanet.com/exxon-mobil-xom-increase-history-yield

    Their payout ratio is only in the mid 70's which makes them royalty among the big oil stocks :-) On the other hand, I just read that the Rockerfeller foundation have sold their XOM stock, which is kind of funny, since Exxon (when it was founded) was started by Rockerfeller :-)

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