When Steve Coll wrote the book Private Empire, he argued that Exxon Mobil Corporation (NYSE:XOM) had become so powerful in countries like Columbia, Brazil, Azerbaijan, Kazakhstan, Angola, Nigeria, and Chad that the Irving-based oil giant often wielded more political power than the governments because of the immense financial might of the company. While some people dispute the characterization that ExxonMobil is stronger than certain governments, the underlying point is that ExxonMobil is so overwhelmingly strong that its power can be compared to governments.
ExxonMobil is Highy Profitable Despite Low Oil Prices
What makes the ExxonMobil experience different from owning any other petroleum-based firm is that ExxonMobil owns over 36,000 wells and refineries that generate a profit at every stage of the process. This is what analysts mean when they refer to ExxonMobil as an “integrated” oil company. During the good times, the integrated business model comes out of fashion as those companies producing and selling oil benefit from other commodity prices and report higher profit growth than Exxon.
The situation becomes reversed during the bottom of the business cycle. When oil is in the $50s, companies like ConocoPhillips (COP) fall out of favor with typical investors because they are expected to lose $500 million this year. With oil low, companies that charge fees to transport oil and provide equipment assistance are back in favor. With others in the industry sputtering, ExxonMobil is expected to make $18.4 billion in net profit this year.
The fact that ExxonMobil maintains all-weather flexibility is important because it can continue to raise the dividend, engage in capital spending for the long-term by replacing reserves, and even repurchase stock while the price of the stock has become cheap.
Since oil got cheap, ExxonMobil has continued to grow reserves by 123% per year. Anything above 100% means that a company is replenishing its oil stock at a faster rate than it is depleting it, and anything below 100% means that reserves are being depleted. Right now, Shell (RDS.A) and BP (BP) are only replacing their reserves at a 40-50% rate, which is no replacement at all—those two companies are burning through their reserves twice as fast as they are replacing them because all of the current profits go towards maintaining the dividend.
ExxonMobil Regularly Repurchases Shares
ExxonMobil is the only oil company in the world right now that is able to retain a bulk of its profits to invest in the future. Even its highest-quality competitor, Chevron (CVX), is paying out 91% of expected 2015 profits as dividends. At Exxon, the dividend payment is $2.92, or almost $12 billion. Even at this low point in the cycle, ExxonMobil will retain $6.4 billion in cash beyond the required dividend payments. This relative abundance of retained earnings is the manifestation of Exxon’s superior business model and explains why over 25+ year time horizons it beats Chevron, BP, Royal Dutch Shell, Conoco, and Total SA on the total return front.
ExxonMobil is the only oil major that regularly repurchases shares while also paying out a growing dividend. If you study BP, Royal Dutch Shell, Conoco, and Total SA, you will see no meaningful reduction in the share count over time. If you study Chevron, you will see some years where the company retires 2% of the stock or so, but the buyback program is neither systematic nor a significant element of total returns.
ExxonMobil is quite different. It has reduced the share count from 6.9 billion in 1999 to 4.2 billion as of the last quarter. On average, ExxonMobil retires around 150 million shares per year (though that has slowed down to 50 million since the price of commodities has fallen.) These buybacks are important—the overall profit growth of 8.5% over the past sixteen years has been able to give ExxonMobil shareholders earnings per share growth of 11% annually thanks to the repurchase program.
ExxonMobil Continues to Raise Dividends
Within the past month, ExxonMobil announced that the dividend quarterly dividend will climb 5.8%, from $0.69 to $0.73. This is what makes the ExxonMobil experience unique. With other oil giants, people are trying to figure out whether BP, Shell, or Conoco will cut the dividend. They pray for mere dividend maintenance. ExxonMobil shareholders wait four quarters, and then ask the question, “How much?”
This is something that has been true throughout Exxon’s history. Dating back to its Standard Oil roots in 1882, the dividend has never been cut. It has grown every year for the past three decades. The strength of the company following Exxon’s merger with Mobil put the company on a trajectory for perpetual dividend growth, as it would take sustained oil prices in the $30s for ExxonMobil to incur a loss on operations.
I do not think the general investor community realizes how great of an income opportunity the 3.5% dividend yield on the stock offers. Since the 1999 merger between Exxon and Mobil, the stock has never gone a full year offering shareholders a 3.5% yield. The highest starting yield that investors could get on the stock came in 2010 when the stock yielded 3.2%. This oil decline has prompted the stock to become cheaper than the prices created during the immediate aftermath of the Great Recession.
The Investment Case for ExxonMobil
One of the best ways to invest for the long-term is to focus on Dividend Aristocrats. Historically, they beat the rest of the stocks in the S&P 500 by a little over two percentage points annually. Of course, the next question is: What Dividend Aristocrat is cheap? While most of the Aristocrats are trading near all-time highs and showcasing P/E ratios that are well above historical averages, ExxonMobil sits in the $84-$86 trading range that places the company below the all-time high of $104 that was reached in the early part of 2014.
Even if you are just getting started with $50 per month to invest, you can visit the Computershare website and begin purchasing ExxonMobil stock each month with absolutely no purchase fees. It is one of the best deals available to new investors because you can methodically build your position without getting mired in high trading fees.
The investing case for ExxonMobil is straightforward: Even at a low point in the commodity cycle, it still makes $18 billion in profits. It possesses significant retained earnings to invest for the future, repurchase stock, and boost the dividend payout ratio if oil stays low for a few years. The starting yield of 3.5% is the best since the 1999 merger between Exxon and Mobil. It’s one of the few high-quality stocks on sale in today’s market.