Why Exxon Mobil Is My Children's Christmas Present This Year

 |  About: Exxon Mobil Corporation (XOM), Includes: BP, COP
by: Ex-Bingo Addict

For Christmas this year, I am giving my kids a different kind of gift. Sure, there will be toys and video games under the tree, but in their stockings though, will be a present that will long outlast any other gift this holiday season. I decided that this Christmas, I would start directly investing for my children.

Neither of them is of working age yet, giving them a time horizon of potentially over 60 years until retirement, this is defiantly long term investing. With that in mind, I am looking to purchase shares that could be easily held for the next 20 years or more.

I found that investment in the largest piece of John D. Rockefeller's former oil empire, ExxonMobil (NYSE:XOM). The former Standard Oil of New Jersey and Standard Oil of New York came back together in 1999 to form the largest energy company in the world.

Why Exxon Mobil ?

As stated above, I want a long term investment that I do not have to baby-sit. The product or service of the company must be necessary at least 20 years from now. Does anybody seriously think that we will not be using oil and natural gas in twenty years?

We have the product (oil and natural gas) but we don't want to overpay. That's what makes Exxon attractive to buy now. It's undervalued with a current PE ratio of 12.6 versus the 15 year historic average of 14.9. Earnings per share of $7.66 give an earnings yield of 7.88% compared to the 10 year Treasury bond paying you 2.75%. Now, that is what you call a margin of safety and you will also receive a dividend yield of 2.7%.

Exxon Mobil 15 Year Fast Graphs Chart

You can also figure on Exxon raising the annual dividend amount. It has hiked its payment to shareholders for the past 31 years. The annual average dividend growth rate for the last 10 years has been 9%.

Exxon has been one of the largest, if not the largest, repurchaser of its own shares. However, while the dividend has been rising, share buybacks are down. Exxon started Q1, 2013 with $5 billion dollars in share repurchasing. That fell to $4 billion in Q2, 2013 and to $3 billion Q3, 2013. Going forward, we can't count on Exxon to keep up even this reduced level of buybacks.

Despite the major stock buyback, overall shares outstanding have not been drastically reduced over the years. Mostly, this has been due to the huge takeover of XTO Energy in 2010 costing it $41 billion in stock. That merger has been a sour note for Exxon in the past two years. At the 2013 shareholder meeting, CEO Rex Tillerson remarked, "Maybe we were off a year or two." He was referring to the supply glut in the natural gas that has hindered XTO, for the past several years.

Fortunately, we're looking to invest for a 20 (or more) year span. It's easier to swallow a bad management decision when your time horizon is that long. How many long time owners of Coca-Cola (NYSE:KO) recall the debut of "New Coke"?

Fortunately, the natural gas supply glut will work itself out between energy conversion and exportation in the coming years. In the long run, Exxon will likely appear to have just been early to the party instead of on a fool's errand buying XTO. That purchase did bring large reserves of natural gas from different regions of the country.

Natural Gas Taking Market Share From Coal in Power Generation

Click to enlarge

How I Bought ExxonMobil

Exxon has one of the best DRIP offerings going. In a DRIP you may initially purchase shares from the company directly (or thru a third party agent). In lieu of receiving a cash payment, dividends will be reinvested into buying additional shares of XOM.

It takes only $250 to start an XOM DRIP. After setup, you can make additional purchases with no added fees and your dividend will be reinvested into new shares every quarter, fee free.

That initial $250 investment will buy you 2.65 shares of XOM (give or take). Those shares will generate dividend income of $6.68 annually. It doesn't seem like the effort was worth it all, at not even ten dollars a year in income. What is the point?

Let's assume that XOM follows it 10 year dividend growth rate of 9% into the future. We'll also assume that XOM shares appreciate just 5% a year. After 20 years of dividend reinvestment, our $250 investment has turned into 5.86 shares worth $1,465.61. That's a 9.25% annualized return, without one more dollar added during that 20 year period. This is not bad for just a few dollars upfront and not doing anything thereafter.

Of course, you may invest more than $250 to begin with. Consider starting with a $2,500 purchase or more to really start the ball rolling. You can always add to your initial investment at a later point. The beauty of the XOM DRIP is that you can easily buy more shares with no fee or commission. All you need is a minimum of $50 to buy more shares.

Not only are DRIPs easy, low costs, and a simple way to invest, but they also provide you a built in place to invest future cash gifts, be whether it birthdays, holidays, or special milestones in a child's life. Considering that bank savings account interest currently pays you next to nothing, you're better off with a blue chip dividend stock. All the while, you'll be helping to build your children's financial nest egg.

Other Low Cost Energy DRIP Alternatives

ConocoPhillips (NYSE:COP) and BP, PLC (NYSE:BP) also has a wonderful low cost DRIP plan. Since Conoco spun off is refining arm to focus on production, it's a pure play on exploration and production. If you prefer to stick to the major integrated oil firms (like Exxon), British BP may be a better fit. Its higher yield of 5% and lower PE ratio of 8 may well outperform ExxonMobil.

Wrapping Up

Investing is about compounding returns over a period of time. My children have the time, now they just need the initial capital to start the process. So this Christmas they will be receiving shares of ExxonMobil in a custodian account. It's not fun as the Play Station 4, but I think they will thank me some day.

Sources: Fast Graphs, Wall Street Journal, CNN Money, Marketwatch, Breakingenergy.com, Wikipedia and energytrendinsider.com.

Disclosure: I am long XOM, COP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.