In 2003, ExxonMobil (XOM) created an astounding $17.03 billion in net profit for investors. As 2013 winds to a close, Exxon is now pumping from the ground $32.95 billion in total profits for its shareholders. In short, the overall profits have grown 93% in total over the past ten years.
But that only tells part of the story: ExxonMobil runs one of the largest, most systematic buybacks in corporate America, and the company's dogged commitment to share count reduction has resulted in the company going from 6.56 billion shares outstanding in 2003 to 4.34 billion at the end of 2013 (the stock screeners that show 4.43 billion shares outstanding use weighted average formulas to calculate their data which gets updated each quarter rather than showing you the updated, current amount of shares in existence). That is a huge part of Exxon's wealth-building story: a third of the company's overall shares that existed in 2003 are now of the books.
Over the past ten years, the earnings per share at Exxon have grown from $2.56 in 2003 to $7.45 in 2013. That's a total per share increase of 191% over the past ten years. When you look at how that earnings per share growth got created over the past decade, you will see that 48.6% of the growth can be attributed to good ole' increases in operational profits, and 51.4% of the earnings per share growth is the result of systematic share count reduction through the buyback program. Due to Exxon's $440 billion size (in terms of market valuation), it is probably no surprise that we have finally reached a tipping point in which growth through buybacks has become the leading cause of earnings per share growth over systematic operational improvements.
On a strategic level, this capital allocation policy should continue to make the shareowners wealthier over time: if you target 10% earnings per share and dividend per share growth over the long term, it's quite difficult for a company of Exxon's size to achieve that feat through organic growth alone. The company would have to take on projects that add $3-$4 billion in annual profits to the company's bottom-line to achieve that type of growth through organic projects alone.
But by dedicating $16-$20 billion of the company's $32 billion profits to buying back shares, the energy giant is able to achieve 4-5% earnings per share growth through the buybacks alone. This means that, to reach the 10% annual earnings per share growth figure, Exxon will only have to grow profits by $1.5-$2 billion annually because the buyback program will pick up the slack and stimulate about half of the company's annual growth in earnings per share figures.
As we study Exxon going forward, it seems reasonable to assume that about half of its earnings per share growth will be the result of organic profits, and the other half will be the result of profits.
In terms of organic profit growth, Exxon is showing signs of following the formula of turning 2% production gains into 4-6% revenue gains and 4-6% profit per share gains. At the refining arm of the company, profits are finally starting to pick up after dropping quickly during the third quarter. Oil and natural gas production in the U.S. and Canada have been enough to grow production by almost 3%, and this will likely translate into an additional $1.5 billion in total profit in 2014 (improving Exxon's overall profit base from $33 billion to $34.5 billion). Additionally, Exxon is sitting on over 25 billion barrels of oil and oil equivalents in its proven reserves.
Meanwhile, Exxon is typically averaging $4-$5 billion in buybacks each quarter (although last quarter's buyback figure dipped to around $3 billion). Although buybacks are somewhat amorphous to measure because you can't document their effects until after the fact, Exxon does have a pretty steady record over the past ten years of retiring 1% of its common shares outstanding each quarter. Even with Exxon's recent increase in valuation from the $90 range to the $100 range, the company is still on pace to take 4.5% of its total shares off the books in the coming year.
For a company of such extensive size, Exxon seems to be employing a rather intelligent strategy to create 10% earnings per share growth going forward. Much of this is due to the non-stop buyback program; when you use $20 billion or so in cash flow to take 4-5% of the shares outstanding off the books, you are almost guaranteeing half of the equation that leads to double-digit growth. Given that Exxon is finally showing the promise of 3% production gains which have historically translated into 5% or so increases in organic profits, it seems that the buyback program is going to do half the heavy lifting in giving Exxon shareholders 10% increases in earnings per share over the coming years.