At the end of 1999, Exxon and Mobil merged in order to better withstand the challenging commodity environment, generate synergies through cost cuts and enrich shareholders. Earnings per share went up from $1.19 in 1999 to over $9.70 by 2012. The company kept repurchasing shares during those years, and has managed to eliminate the diminutive effect of the ExxonMobil merger in 1999 and the acquisition of XTO in 2010. If you had bought ExxonMobil stock in 1999, reinvested dividends for the next 17 years, you would be sitting on a nice gain of 224% and earning a yield on cost of 7.50%. Buying ExxonMobil in 1999 would have been difficult, because its operating performance was flat over the preceding 15 years. Yet, it turned out to be a good investment, because the business was about to turnaround.
So what is the lesson from all of this? The best way to conquer the ups and downs of the commodity cycle is to follow a disciplined plan of regular investment through the ups and downs. The future returns on companies are not predictable, and do not come on a schedule. Long periods of expansion, could be followed by long periods of things going nowhere. This is why it is important to stay the course through thick or thin, and to avoid bailing out at the first type of “trouble”. Please remember that it is time in the market that makes the most money for patient individual investors, and not timing the market.
In the case of Exxon Mobil Corporation (NYSE:XOM), investors today earn a starting yield of 3.50% – 4%. I believe that the dividend is safe. Let’s assume that oil and gas prices remain low, around current levels, for the next 10 – 15 years. This would translate into flat revenues and net income during those 10-15 years. When you have a high starting yield which is dependable, you do not need a lot of growth to compound net worth and income at a conservative average rate of rate.
It is quite possible that the company can squeeze in another 2.5% – 3% growth in annual earnings per share through cost cutting, share buybacks, and through strategic acquisitions of assets from smaller competitors which have fallen to bad times. This is a very conservative estimate. We know that small changes, compounded over time, could result in huge progress at the end of the study period. This means that an investor in ExxonMobil today, who reinvests their dividends, could conservatively expect to double their income and capital every decade, even if prices remain low. In my case, I would be interested in owning more of ExxonMobil if it falls to the low 70s/share and below.
If you put money to work each month for years in a company through the ups and downs, reinvest those dividends, and stick to your plan, chances are you will come out ahead. This only works for strong companies that are dominant in their industry. If you do this for a weak company with overleveraged balance sheet, you are taking a risk that a potential bankruptcy can take your investment plan down with it. I believe that an investor who follows a disciplined plan, where the regularly add to a company like ExxonMobil, and reinvest their dividends will do fine over the next 20 – 30 years. Preferably, this investor will keep these shares in a Roth IRA, in order to avoid paying any taxes on future dividends and capital gains.
Full Disclosure: Long XOM and CVX
