Dividend Aristocrats Part 31: Exxon Mobil Corporation (XOM)

Oil prices have fallen around 60% in the last year and a half.

Exxon Mobil Corporation (NYSE:XOM) is the largest oil corporation in the world…  The company’s earnings are tied to oil prices.  The image below shows ExxonMobil’s stock price through the recent period of falling oil prices.

Despite a roughly 60% decline in oil prices, ExxonMobil stock is down around 20% from highs in mid-2014.

How is this possible? Despite low oil prices, ExxonMobil is still expected to make around $17 billion in 2015…

That is just one of the reasons ExxonMobil is one of the most popular energy stocks among the world-class investment firms tracked by Insider Monkey. ExxonMobil was in the equity portfolios of 61 of those investors on September 30, with them holding $3.19 billion worth of its shares. It should be noted however that this accounted for a mere 1% of Exxon’s common stock, making these top investors underweight ExxonMobil. The 61 investors with long positions also represented a decline from 67 quarter-over-quarter. Richard S. Pzena’s Pzena Investment Management boosted its stake by 46% in the third quarter, to just under 6.11 million shares. On the other hand, Eric W. Mandelblatt’s Soroban Capital Partners made a 425% hike to its position of ExxonMobil shares underlying put options.

ExxonMobil is well diversified within the oil and gas industry.  The company operates in 3 segments:  Upstream, Downstream, and Chemical.  The company’s earnings by segment in its most recent quarter are shown below:

 – Downstream earnings of $2.03 billion

 – Upstream earnings of $1.36 billion

 – Chemical earnings of $1.23 billion

Most businesses can only dream (if they even dream that big) of making over $4 billion a quarter in profit.  ExxonMobil is doing this in a very difficult operating environment for the company.

Compare ExxonMobil’s earnings by segment above to its earnings by segment in the 3^rd quarter of 2013, when oil prices were high.

 – Downstream earnings of $0.59 billion

 – Upstream earnings of $6.71 billion

 – Chemical earnings of $1.03 billion

In 2 years, the Downstream segment’s earnings have nearly tripled, while the Upstream segment’s earnings have declined by about 80%.  The Chemical segment’s earnings have grown by about 20% in the last two years.

This shows how ExxonMobil combats periods of low oil prices.  It makes considerably more money in its downstream division.

There’s no question that the Upstream division is ExxonMobil’s ‘cash cow’.  When oil prices are high, it generates more on its own than the entire company does when oil prices are low.  Obviously, high oil prices are great for ExxonMobil.

Low oil prices, however, don’t hurt the company as much as you’d expect.  That’s because low oil prices are good for the Downstream and Chemical divisions.

This is not ExxonMobil’s first experience with low oil prices.  The company has paid increasing dividends for 33 consecutive years.  The company’s dividend streak is really much longer than that.  ExxonMobil has paid steady or increasing dividends every year since 1949.  Even better, ExxonMobil has paid a dividend every year since 1911.

The Power of ExxonMobil

Tim McAleenan Jr. wrote the following in an article on Sure Dividend:

“When Steve Coll wrote the book Private Empire, he argued that ExxonMobil 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’s peak earnings year (so far) was in 2008 when oil prices spiked.  The company made $45.2 billion in 2008.  That’s greater than the 2015 GDP of countries like Syria, Jordan, Bolivia, and Panama.

ExxonMobil’s mix of political power from oil politics and massive cash flows from its oil business put it in the realm of power reserved for governments, not what is traditionally seen in business.

ExxonMobil’s Competitive Advantage

Exxon Mobil Corporation (NYSE:XOM) is one of (if not the most) powerful corporations in the world.  The company also has an extremely long dividend streak.  The combination of these two facts shows that ExxonMobil has a durable competitive advantage.

ExxonMobil’s competitive advantage comes from its massive size.  ExxonMobil’s tremendous earnings power allows it to:

 – Diversify across a wide range of projects

 – Be involved in large scale oil and gas projects

 – Provide leverage for dealing with governments

The oil and gas industry has long held close ties to the US government.  ExxonMobil has spent more than $10 million a year lobbying every year since 2006.  It makes a great deal of sense for ExxonMobil to focus on government policy.  The company is significantly affected by both US foreign policy and environmental laws.  Overall, ExxonMobil hopes to gain better legislation through its lobbying efforts.

The company’s unique combination of diversification, size, and political influence give ExxonMobil its strong and durable competitive advantage.

Growth Prospects

ExxonMobil’s main future growth driver is rising global energy demand.  Global energy demand is expected to trend upward due to population growth and rising GDP in developing markets.

Demand growth from population and broadening middle classes will be partially offset by efficiency gains from advancing technology. An example of this is the increases in fuel efficiency in the auto industry over the last twenty years.  Still, the overall trend is more energy use, not less.

Source:  ExxonMobil Outlook for Energy in 2040, page 44

There is only a finite supply of oil and gas on earth. Fracking and deep water operations have allowed ExxonMobil (and its competitors) to find and produce oil that would have been impossible or uneconomical in the past.  Better technology allows oil companies to produce more oil going forward, not less.  So much for peak oil.

ExxonMobil’s long-term growth outlook is favorable due to the expected demand increases in energy over the next several decades.

The company will likely grow earnings-per-share faster than overall energy demand due to share repurchases, efficiency gains, and possible market share gains.

Expected Total Returns

ExxonMobil stock currently has a dividend yield of 3.6%.

ExxonMobil’s earnings are tied to oil prices.  As a result, they are very volatile.  Using average earnings-per-share over a 10 year period helps to ‘smooth’ the company’s earnings and give a better picture of earnings growth.

Average 10 year earnings have grown from $4.17 a share in 2008 to $6.83 a share in 2015.  This comes to a compound annual growth rate of 7.3% a year.  From 1999 through 2015, dividends-per-share have grown at a compound rate of 8.0% a year.

A sizeable portion of ExxonMobil’s growth over the last 15 years is a result of share repurchases.  The company has repurchased around 3.0% of its shares outstanding every year on average for the last 15 years.  I expect share repurchases of around 3.0% a year to continue over the long-run for ExxonMobil shareholders.

For long-term investors, I expect total returns of 8.5% to 10.5% a year from the following sources:

 – Dividends of ~3.5%

 – Share repurchases of 3.0% a year

 – Margin improvements of 1.0% a year

 – Organic growth of 1.0% to 3.0% a year

Keep in mind that these numbers are over long enough time periods to encapsulate both rising and falling oil prices.

Valuation

Exxon Mobil Corporation (NYSE:XOM) stock is about 20% off 2014 price highs.  The company is currently trading for a price-to-earnings ratio of 17.3.

Due to the volatility of oil prices and the impact this has on ExxonMobil’s earnings, dividend yield is a better metric to use to assess ExxonMobil’s valuation.  Specifically, ExxonMobil’s historical dividend compared to its current dividend.

The image below shows ExxonMobil’s dividend history over the last ~40 years.

ExxonMobil is currently trading near dividend yield highs not seen since the mid 1990’s.  Don’t hold your breath waiting for the company to hit 10%+ dividend yields again (like in the early 1980’s)…  The company is very likely undervalued at current prices today based on its dividend yield over the last 20 years.

Final Thoughts

ExxonMobil has been a Top 10 stock using The 8 Rules of Dividend Investing in the past.  The stock still holds an above average rank today.

ExxonMobil’s diversified businesses give the company enough cash flows to pay increasing dividends even through periods of low oil prices.  When oil prices rise, ExxonMobil becomes even more profitable.  The company has an excellent track record of returning its profits to shareholders through dividends and share repurchases.

ExxonMobil is the Gold (black gold?) standard in safe dividend growth oil and gas companies.

Disclosure: None