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Summary

  • Exxon Mobil offers shareholders a CAGR of around 9% from growth (4%), dividends (2.5%) and share repurchases (2.75%).
  • Exxon Mobil's profits are primarily from its upstream business.
  • Exxon Mobil is a highly profitable shareholder friendly corporation suitable for long-horizon dividend investors.

Exxon Mobil (NYSE:XOM) is the world's largest integrated oil and gas corporation and the second largest corporation in the world based on market cap, behind only Apple (NASDAQ:AAPL). Exxon Mobil holds the record for highest profits in one year by a corporation. In fact, it has the top 5 highest years of profit ever for a corporation.
Source: Largest Corporate Annual Earnings

Exxon Mobil operates in 3 divisions: upstream, downstream and chemical. The bulk of Exxon's profits come from the company's upstream division.


Source: 2013 Exxon Mobil Financial and Operating Review

Growth

Exxon Mobil has grown revenue by about 4.5% per year over the last 10 years. Energy use is expanding globally, with the biggest gains coming from Asia. Energy demand will grow slowly for the foreseeable future.

(click to enlarge)Source: Exxon 2014 Analyst Presentation, Page 17

Valuation

Exxon is fairly valued compared to its peers:

Company

Ticker

P/E

Exxon

XOM

13.21

Shell

RDS.A

15.27

Chevron

CVX

10.75

PetroChina

PTR

11.40

Total SA

TOT

13.24

BP

BP

6.65

Exxon's historical 10-year average P/E ratio is only about 11.5. Exxon is slightly overvalued compared to its historical P/E ratio.

The S&P 500's P/E ratio is 18.64. Exxon compares very favorably to the S&P 500's P/E ratio.

I believe Exxon is fairly valued at this time based on its peer group, historical P/E ratio and P/E ratio relative to the S&P 500.

Dividend Aristocrat Comparison

Exxon Mobil compares favorably to other dividend aristocrats using the five buy rules from the Eight Rules of Dividend Investing.

Rule 1: 25-plus Years of dividend increases.
Pass: Paid increasing dividends for 31 consecutive years.
Why it Matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88% per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Rule 2: Rank Stocks by Dividend Yield.
Rank: Exxon has a dividend yield of 2.59% which ranks it at 43 out of 102 stocks with increasing dividends for 25-plus years.
Why it Matters: The highest yielding quintile of stocks outperformed the lowest yielding quintile of stocks by 1.76% per year from 1928 through 2013.
Source: Dividends: A Review of Historical Returns by Heartland Funds, page 2

Rule 3: Rank stocks by payout ratio.
Rank: Exxon has a payout ratio of 34.24% which ranks it at 29 out of 102. Exxon's payout ratio is higher than the majority of other dividend aristocrats.
Why it Matters: High yield low payout ratio stocks outperformed high yield high payout ratio stocks by 8.2% per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Rule 4: Rank stocks by revenue per share growth.
Rank: Exxon has a revenue per share growth rate of 8.26% over the last 10 years, ranking it 13 out of 102.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4% per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Rule 5: Rank stocks by their standard deviation.
Rank: Exxon's long-term standard deviation of 25.33% ranks it at 33 out of 102.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2.00% per year for the 20-year period ending September 30th, 2011.
Source: S&P 500 Low Volatility Index: Low & Slow Could Win the Race, page 3

Shareholder Return

Exxon CEO Rex Tillerson said it best about Exxon's shareholder return:

Since the beginning of 2009, Exxon Mobil has distributed $131 billion to shareholders, including $47 billion of dividends and $84 billion of share repurchases to reduce shares outstanding. During this five year period, Exxon Mobil distributed to shareholders 50% of the cash flow from operations and asset sales. The payout ratio is double that of our nearest competitor over that period. In addition, we increased per share dividends by 59%. This included an 11% increase in the per share dividend in the second quarter of 2013 which marks the 31st consecutive year Exxon Mobil has increased the dividend on a per share basis.

Since the time of the Exxon and Mobil merger, share repurchases have reduced shares outstanding by nearly 38% from 7 billion shares in 2000 to 4.3 billion shares at year-end 2013.

Source: Exxon 2014 Analyst Meeting

Exxon is very shareholder friendly. The company compares favorably to its industry peers based on the percentage of cash flows it has returned to shareholders.

(click to enlarge)

Source: Exxon 2014 Analyst Presentation, Page 13

Conclusion

Exxon is a strong dividend paying company which offers shareholders a CAGR in the range of 9% resulting from growth (~4%), dividends (2.59%), and share repurchases (~2.75%).

Exxon is a shareholder friendly corporation that has increased its dividend for 31 years consecutively. Exxon's size and position in the oil and gas industry gives it a strong competitive advantage. Exxon will remain a solid investment as long as the world runs on oil and gas.

Source: Exxon Mobil: Black Gold Or A Lump Of Coal?