When’s the last time you put gas in your car?
The last time you passed a gas station?
The last time you turned on a light switch?
How about the last time you operated anything that required energy?
Energy is all around us.
Since the dawn of the industrial revolution, energy has become a bigger and bigger part of our lives.
As such, you might wonder if there isn’t a profit to be made here.
Well, I’m here to tell you that I’ve personally profited investing in big energy companies.
The bigger, the better, in my opinion.
And the biggest of them all is Exxon Mobil Corporation (XOM).
If you want to take on the massive energy projects that are profitable, you need the size and scale to be able to do so. And none are bigger than Exxon Mobil.
Think back to a gentleman by the name of John. D. Rockefeller.
You might remember him as the richest person in American history.
Well, he founded Standard Oil way back in 1870, and Exxon Mobil is a direct descendant of that massive energy company.
Who wouldn’t want to invest like Rockefeller?
Count me in!
As a dividend growth investor, I look to invest in companies that aren’t only wonderful, but I also want to invest in companies which reward loyal shareholders with rising dividend payouts year after year.
Exxon Mobil definitely fits the bill.
After all, they’ve increased their quarterly per share dividend for the last 35 consecutive years.
As a result, the stock is a “Dividend Champion” on David Fish’s Dividend Champions, Contenders, and Challengers document – a list of more than 800 US-listed stocks with at least five consecutive years of dividend raises.
And their size, scale, consistency, and business model of providing the energy the world needs to operate are just a few reasons why I’m a shareholder in this energy supermajor.
Exxon Mobil is the world’s largest publicly owned integrated energy company. They’re involved in the exploration for oil and natural gas and the production of oil and natural gas and related products. They participate in the marketing, transportation, and sale of crude oil, natural gas, and petroleum products.
One thing is for sure: the global population is expanding, and so the world’s energy needs are also increasing as a consequence.
As developing countries across the world continue to foster burgeoning middle classes, energy consumption will naturally rise.
Exxon Mobil predicts global energy demand will rise approximately 25% by 2040 on the back of global GDP doubling by this time. And this growth will likely occur even as technology improves efficiency because of the aforementioned increase in population, purchasing power, and overall consumption across the globe.
The company is positioned very well to capitalize on this growth in demand via numerous large-scale projects around the world. To promote growth and capitalize on its opportunities, Exxon spent $19.3 billion in capital and exploration expenditures during 2016. 27 major projects have been started since 2012. And this is all while Exxon Mobil has suffered through one of the worst slumps in oil prices ever.
That slump has affected Exxon Mobil’s top line and bottom line somewhat significantly, but the resiliency of the business, bolstered by its scale and integrated model, has proven its worth.
The company’s revenue dropped from $404.552 billion to $226.094 billion between fiscal years 2007 and 2016.
Meanwhile, earnings per share dropped massively over this same time period – down from $7.26 to $1.88.
However, it’s important to keep a few things in mind.
First, this industry is cyclical.
Second, the company is still taking in a ton of money. The last 10 years included the Great Recession – the worst financial crisis my generation has ever seen – and one of the worst peak-to-trough drops in oil pricing ever recorded. Yet Exxon Mobil still brought in over $225 billion in sales, and the company’s net income came in close to $8 billion.
Third, because of the company’s resiliency, experience, integrated business model, efficiency, and scale, they were still able to keep pumping their shareholders’ pockets with growing dividends straight through what has been a catastrophe for the company’s economic picture.
It’s in that light that we should consider just how impressive their 35-year dividend growth streak is, as this recent period has been about as good a “stress test” as you’ll find for the company’s wherewithal to continue paying and increasing their dividend.
Moving forward, the company will very likely be in a much better position to continue paying and growing that dividend, as the rebound in oil pricing has already started.
Indeed, CFRA (a professional analysis firm) is projecting a 75% compound annual growth rate in Exxon Mobil’s EPS over the next three years.
That bodes well for dividend growth investors, as it will only serve to improve what are already-impressive dividend growth metrics.
Looking at that dividend and the growth of it, the dividend has grown at an annual average rate of 8.8% over the last 10 years.
That’s a very strong long-term dividend growth rate all by itself. But considering all of the aforementioned challenges this company has faced, it’s especially magnificent. And the picture looks even brighter moving forward.
The payout ratio, meanwhile, is hovering near 100%.
But that’s on depressed earnings that have already started to shoot back up again. It’s likely that this payout ratio will be coming down dramatically over the coming quarters.
While one waits for that recovery, though, the stock yields a very healthy 3.5%.
That’s appealing no matter how you slice it.
It’s much higher than the broader market. But it’s also approximately 30 basis points higher than the stock’s own five-year average yield, meaning investors are getting paid a nice yield premium to wait for the business and dividend growth to return to more historical norms.
The company’s balance sheet has long been a source of incredible strength, but it’s taken a hit in recent years while they’ve dealt with the ongoing oil pricing crisis.
Still, it’s a very strong balance sheet.
The long-term debt/equity ratio stands at 0.17, and the interest coverage ratio is over 18.
The latter will most likely jump significantly after the company’s EBIT recovers.
This is a great example of Exxon Mobil’s prudent cash management – plenty of room on the balance sheet is desirable for a company like this, as catastrophic disasters and lengthy industry downturns are always a risk.
Recent profitability is also not as robust as it has long been, but the averages still add up to a solid business.
Over the last five years, the business has averaged net margin of 6.82% and return on equity of 15.97%.
Exxon Mobil maintains its desire to return capital to shareholders, even in the face of so many near-term challenges. The company returned more than $12.4 billion to shareholders in FY 2016. And the company has reduced its outstanding share count by ~25% over the last decade.
If you’re looking for a company to reliably and regularly return more and more cash to you in the form of dividends and buybacks, Exxon Mobil is your huckleberry.
However, one should keep in mind that risks are always present with a company like this.
The price of oil and gas can be volatile, and so Exxon Mobil’s profit can swing quite a bit from year to year. We can see that via the numbers shown earlier.
In addition, they operate in a number of countries around the world with sensitive political issues and potential government intervention.
The rise of alternative energy sources (like wind and solar) could serve to reduce demand for oil and gas, but the overall rise in global energy consumption that is likely to play out over coming decades means there should still should be increasing demand for traditional energy forms for many years to come.
Although unlikely at any given time, there is also always the risk of a catastrophic oil spill or other major disaster.
Shares in the oil supermajor are currently trading hands for a price-to-earnings ratio of 28.3.
This compares rather unfavorably to the stock’s own five-year average P/E ratio of 19.9; however, the P/E ratio can vary considerably from year to year due to the volatility in oil prices and Exxon Mobil’s reported EPS.
That said, investors seem to be paying an appropriate amount for the company’s sales and cash flow, based on recent respective historical averages.
And the yield, as noted earlier, is materially above its own recent historical average.
I valued shares using a dividend discount model analysis with a 10% discount rate (my desired rate of return) and a 6% long-term growth rate.
This long-term DGR appears reasonable, as it’s well below the company’s 10-year demonstrated DGR. Even the three-year dividend growth rate for the stock is 6.6%, and that was during one of the worst stretches that you’ll probably ever see for the business.
But I’m factoring in the risks of a continued downturn, a slight deterioration in the fundamentals over the last few years, and the rising supply of alternative energy sources. To err on the side of caution is prudent.
The DDM analysis gives me a fair value of $81.62, indicating the stock is a bit overvalued right now.
Bottom line: Exxon Mobil Corporation (XOM) is a massive oil supermajor, and it’s a direct descendant of Rockefeller’s Standard Oil. With growing demand for energy across the globe playing out every day, Exxon Mobil’s scale, integrated business model, resiliency, experience, and resources serve to position it well to capitalize on that trend. And shareholders continue to capitalize on that, too, via a big dividend that continues to grow year in and year out.
— Jason Fieber
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