As a value investor, the key to success is to consistently identify undervalued companies that have lost favor. I find that once out of favor, the stock tends to be marked down to an advantageous level offering a patient long term investor an attractive entry point. I believe Exxon Mobil Corp (XOM) currently exemplifies an undervalued company. The article below will cite three main reasons to support the investment case for XOM.
Earnings per share
Dividend per share
Book value per share
Shares outstanding in millions
Return on equity
The primary reason to consider purchase of XOM today revolves around the use of the cash it generates through the sale of its products. As we can see from the chart above XOM has repurchased roughly 29 percent of its shares outstanding since 2004. In 2010, XOM purchased XTO energy and issued some stock to close the transaction. The subsequent shares issued have been reabsorbed by the company. Buybacks are an excellent tax efficient way to return excess cash to shareholders. This strategy works well for patient investors as the effects of the buybacks compound with the passage of time.
Along with the significant buybacks the company has rewarded shareholders with consistent dividend hikes in the same time frame. As we can see from the table above the dividend has more than doubled since 2004 offering income seeking investors a nice bump in yearly income. The dividend income received is greater than most short term bonds adding to the attraction of holding the shares.
Henry Hub Gulf Coast Natural Gas Spot Price (Dollars/Mil. BTUs)
Source: US energy information center
The second reason for purchase of the shares revolves around the XTO energy purchase. With the purchase, XOM has now tilted its revenue mix to a roughly even split between oil and natural gas. The price of natural gas has plummeted since 2010 with the addition of new reserves that have come online. The price bottomed out in April 2012 at roughly $1.95, helping to explain why XOM shares have underperformed the market. The price has steadily increased since which should enhance XOM's bottom line and offset some of the weaker pricing in the crude oil market.
The final reason to support my investment thesis revolves around the size and scope of the company itself. With a market cap of over 400 billion dollars and a product with insatiable demand, XOM is a model of stability. The company will still feel the effects of a recession as its main product is a commodity, however, it is extremely profitable. The company has a long established track record of profitability combined with ever increasing dividends. XOM currently trades at less than 1x sales and a P/E ratio of less than 10. At these reasonable levels combined with an aggressive share repurchase, a long term investor should do very well.
In summary, I am long the shares of XOM and view them as very attractive at their current level. XOM is a long term hold and I will be reinvesting the dividends received. Thank you for reading and I look forward to your comments.
Additional disclosure: Thank you for reading the article. The article is intended for informational purposes only.