If you're looking to engage in the practice of DRIP investing, there are some side issues that you need to take into account when making decisions that make DRIP investing a very different beast than the typical practice of paying $10 or so and making a lump sum investment. When you DRIP invest, you have to be particularly sure about the long-term health of the business because the purpose is to gradually accumulate shares over time, as opposed to the Benjamin Graham approach to investing that deals with the deliberate purchase of undervalued securities with the intention of selling them at fair value. With DRIP investing, you regularly accumulate shares of a company and attempt to share in its growth story over time.
There are certain qualities that Exxon Mobil (NYSE:XOM) possesses which make it a somewhat ideal DRIP holding for investors:
1. The stock price does not usually get excessively overvalued. Exxon is a company valued at over $400 billion. It is a component of just about every index fund, trust fund, and pension plan you can imagine. It is widely covered by dozens of analysts, and owned by plenty of retail investors (with good reason). In most years, it will trade within 15% or so of fair value based on historical patterns and commonsense forward projections for a company of its size.
Sure, you can look back on a chart and see that there were some moments in 2007 and 2008 when the stock was trading in the $90s and it may not have made a whole lot of sense to buy, but for the most part, you can be reasonably assured that a dollar cost averaging plan will allow you to achieve total returns equal to the long-term earnings growth of the company. Having $100-$500 taken out of your checking account each month to purchase shares of a certain company requires more art than science because no one wants to buy $300 worth of stock for four months in a row only to find their stock 30% overvalued, and Exxon is on the list of companies you can purchase every month without getting "stomped out" and having to suspend your investment plan because the stock gets excessively expensive.
2. The dividend has a high likelihood of growing every year, and Exxon may be in the early stages of increasing its dividend growth rate. The company has been raising its dividend for 31 years, and if you trace Exxon's history back to its Standard Oil days, you will see that the predecessor company combined with the "new Exxon" has paid an uninterrupted dividend since 1882.
More interestingly, we are seeing signs that not only is Exxon's dividend reliable, but its dividend growth rate is starting to pick up. After years of 6-7% dividend growth rates that trailed its peers Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP), Exxon seems to be showing signs of increasing its payout ratio and granting shareholders a more impressive growth rate in the dividend. In 2012, Exxon raised its dividend from $0.47 to $0.57. That was a dividend growth rate above 20%. Last month, Exxon raised its dividend to $0.63 per share. That's a 10.5% raise. Provided stable oil, natural gas, and chemical prices going forward, it may be reasonable to assume that Exxon's 6-7% annual dividend raises have a decent chance of becoming 8-11% dividend raises over the medium term.
3. The company holds up well in "worst case scenarios." There are quite a few benefits to selling indispensable commodities that generate billions of dollars in profit across 48 different countries. With Exxon's size, it demonstrates a remarkable resiliency (especially for a cyclical company) to hold up well in worst case scenarios.
When we look at Exxon's history, it is fair to estimate that 2009 represented the worst year in a generation for Exxon operationally. Earnings took a substantial hit as oil prices declined sharply. Even in this "worst case" environment, Exxon still generated $19 billion in profit. It was able to raise its dividend and return $8 billion into the pockets of shareholders. The company bought back at least $2 billion every quarter. In a terrible operating environment that only shows up a couple of times in an investing lifetime, Exxon still managed to generate billions of dollars in profit, grow the dividend, and buyback shares simultaneously.
4. The company always has an eye on the future. When you enter the world of DRIP Investing, the long-term stability of your shares is probably a top priority. You do not want to spend a decade of your life putting a couple of hundred dollars into a company only to see it disappear (ask anyone who dripped into Wachovia stock what that is like). With Exxon, you do not have that worry.
The company had $13 billion in cash assets going into 2013. The company replaced reserves at a rate of 115% last year, and the company made capital expenditures of $38 billion in 2012 to add chemical factories and expand refineries. These are the kinds of unparalleled investments for the long-term future that Exxon is able to make that is rarely seen among large-cap companies.
Exxon generates about as much in annual profits (~$37 billion) as the annual GDP of Lebanon. Exxon's annual net profits would make it about the 87th largest country in the world, if you compare Exxon's net profits to GDP.
It is doing the kinds of things that make it an ideal DRIP investment. It usually does not get terribly overvalued. The company buys back about 1.25% of its total outstanding share count every ninety days. The dividend has been paid without interruption since the 19th century, and the dividend growth rate has been increasing. The company has well over $10 billion in the proverbial bank. The reserves are getting replaced at rates over 100%, and capital expenditures remain aggressive. Oh, and the company charges $0 for each purchase. This confluence of factors make Exxon Mobil an ideal DRIP investment.
To begin the DRIP process with Exxon, you can click here.