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Summary

  • Exxon's Buyback Currently Retires 4-5% Of Shares Per Year.
  • Production Growth Is Set To Increase By 7% In Total Over The Next Three Years.
  • Buyback Plus Production Growth Creates Fertile Ground For Dividend Growth In The 10% Range.

Right now, Exxon Mobil's (NYSE:XOM) overall profits seem to have stagnated in the $32-$34 billion range as the oversupply of oil and natural gas in Canada, the United States, and China have put Exxon in the position where its near-term growth won't benefit much from higher prices.

That's not a crisis because, when a company is generating over $30 billion in profit and is only spending a third of that on already committed dividends, it has other options for creating shareholder value even when the prices of commodities are not rising.

It can: buy back stock, raise the dividend, and engage in organic growth projects that will raise production. In the case of Exxon, it is doing all three.

In the case of the buyback, Exxon has been retiring shares every year this millennium (the share count did increase in 2010 after the XTO acquisition, but the presence of the buyback allowed Exxon to quickly mop up all but 200 million of those shares issued).

Although the actual percentage of shares retired fluctuates along with share price, Exxon is generally committed to buying back 4-5% of its outstanding stock each year. The company's long record of doing this, coupled with the tens of billions of dollars in new investment that will be adding to the production numbers in 3-4 years, puts Exxon in the "sweet spot" range of 10% or so earnings per share growth that grants management the capacity to raise the dividend by roughly 10% each year on average going forward.

For prospective and current Exxon shareholders, things worth getting excited about are projects that "move the needle", which is no small feat for a company that is producing $32-$34 billion in net profits per year, depending on the prices of energy. Exxon has allocated about $40 billion to growing production in Canada and Australia, and the expectation is that total production will increase 6-7% in the next three years.

To put it all in oil equivalent terms, Exxon averages about 4.6 million barrels of production per day. The current substantial investments are aimed at increasing those production figures to the equivalent of nearly 5 million barrels of production per day by 2017 or so.

If you are looking for a company that should have long-term dividend growth going forward, it seems that Exxon has three ways in which it can do this. You've got the buyback program, which as mentioned above, would allow the company to raise the dividend by 5% each year indefinitely even without taking into account future growth simply due to the smaller shareholder base requiring fewer total dollars in dividends.

Secondly, you have ambitious capital allocation policies in Canada and Australia which ought to boost production by 6-7% over the next few years, and incidentally, Exxon can usually translate each percentage point of production growth into more than a percentage point of earnings growth simply due to increased efficiencies. That is to say, it's not uncommon for 6-7% production gains to lead to 8-9% gains in profit growth.

And then, there is the third element, which is generally the flakiest of the three: higher prices of commodities. What I appreciate about Exxon's business model is that it is essentially peerless (with arguably Chevron (NYSE:CVX) included) when it comes to creating a business model that does not necessarily rely upon rising commodity profits to achieve growth. That is to say, if prices stayed stagnant for five years, it is entirely possible that (1) Exxon's buyback, (2) current dividend payout, and (3) anticipated production growth could give investors total returns around 10% each year just by doing the math of combining 5% share count reduction with a 2.5% cash payout with production that is expected to grow 6-7% in the next couple of years.

Since coming out of the recession, Exxon's dividend has been booming. The dividend payout of $0.42 quarterly in 2010 increased to $0.63 per quarter by the end of 2013, for 50% total growth over three years. And still, the dividend represents only a third of total profits. The next ten years ought to serve as a mini-golden age for Exxon shareholders; there's a lot to like here. The reserves are being replaced at a 120% rate, the company has 25 billion barrels of oil and oil equivalent reserves, the buyback is building in 5% annual earnings per share growth, and the production is set to hit the 5 million barrel per day mark in the next 3-4 years. When you combine it all together, you see a portrait of a company set to grow its dividend by 8-12% over the coming ten years.

Disclosure: I am long XOM. 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.

Source: Exxon Mobil: The Dividend Growth Picture Looks Unusually Bright