Dividend Aristocrats Part 31: Exxon Mobil Corporation (XOM) by Ben Reynolds, Sure Dividend
Oil prices have fallen around 60% in the last year and a half.
Exxon Mobil (XOM) is the largest oil corporation in the world… The company’s earnings are tied to oil prices. The image below shows Exxon Mobil’s stock price through the recent period of falling oil prices.
Despite a roughly 60% decline in oil prices, Exxon Mobil stock is down around 20% from highs in mid-2014.
How is this possible? Despite low oil prices, Exxon Mobil is still expected to make around $17 billion in 2015…
Exxon Mobil 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. Exxon Mobil is doing this in a very difficult operating environment for the company.
Compare Exxon Mobil’s earnings by segment above to its earnings by segment in the 3rd 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 Exxon Mobil combats periods of low oil prices. It makes considerably more money in its downstream division.
There’s no question that the Upstream division is Exxon Mobil’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 Exxon Mobil.
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 Exxon Mobil’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. Exxon Mobil has paid steady or increasing dividends every year since 1949. Even better, Exxon Mobil has paid a dividend every year since 1911.
The Power of Exxon Mobil
“When Steve Coll wrote the book Private Empire, he argued that Exxon Mobil 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 Exxon Mobil is stronger than certain governments, the underlying point is that Exxon Mobil is so overwhelmingly strong that its power can be compared to governments.”
Exxon Mobil’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.
Exxon Mobil’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.
Exxon Mobil’s Competitive Advantage
Exxon Mobil 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 Exxon Mobil has a durable competitive advantage.
Exxon Mobil’s competitive advantage comes from its massive size. Exxon Mobil’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. Exxon Mobil has spent more than $10 million a year lobbying every year since 2006. It makes a great deal of sense for Exxon Mobil to focus on government policy. The company is significantly affected by both US foreign policy and environmental laws. Overall, Exxon Mobil hopes to gain better legislation through its lobbying efforts.
The company’s unique combination of diversification, size, and political influence give Exxon Mobil its strong and durable competitive advantage.
Exxon Mobil’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: Exxon Mobil 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 Exxon Mobil (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.
Exxon Mobil’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
Exxon Mobil stock currently has a dividend yield of 3.6%.
Exxon Mobil’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 Exxon Mobil’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 Exxon Mobil 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.
Exxon Mobil 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 Exxon Mobil’s earnings, dividend yield is a better metric to use to assess Exxon Mobil’s valuation. Specifically, Exxon Mobil’s historical dividend compared to