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Summary

  • Exxon is the world's largest publicly traded oil and gas company.
  • Unconventional oil supplies are fueling Exxon's growth.
  • Exxon has an above average dividend yield and solid historical growth.
  • Shareholders of Exxon have greatly outperformed the market over the last 20 years.
  • Energy demand will continue to increase as global consumption and population rise.

Exxon Mobil (NYSE:XOM) is the world's largest publicly traded oil and gas company. The company has the largest inventory of oil and gas resources of any oil and gas business. Exxon is also the world's largest refiner and marketer of petroleum products. The company's chemical business is one of the largest in the world, as well.

Current Events

Exxon's revenues dipped about 1.5% for the first quarter of 2014 compared to the first quarter of 2013. Earnings fell slightly as well due to lower downstream and chemical sales, and higher corporate and financing expenses. Fluctuations in earnings and revenue are normal for oil & gas companies as they are dependent upon ever-changing oil and gas prices.

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Source: 2014 Q1 Presentation, slide 6

The company's long-term growth prospects remain strong despite disappointing first quarter results. New technologies continue to open up more oil and gas reserves for Exxon. This trend will likely continue far into the future, giving Exxon significant room for growth.


Source: 2014 Annual Meeting Presentation, slide 18

Exxon's chemical division will likely grow quicker than the company's upstream and downstream divisions due to increasing global demand for chemicals. The Asia Pacific region in particular is demanding more and more chemical products as per capita GDP improves. Global chemical demand is expected to increase rapidly over the next several years.

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Source: 2014 Annual Meeting Presentation

Shareholder Return

Shareholders of Exxon have done very well over the last few decades. A $1,000 investment in the company twenty years ago would be up over 10x, trouncing the stock market and Exxon's peers over the same time period.

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Source: 2014 Annual Meeting Presentation

Looking ahead, shareholders of Exxon can expect a compound annual growth rate of between 8.5% and 11% from the following sources:

  • Share repurchases: 3.5%
  • Dividends: 2.5%
  • Organic Growth: 2.5% to 5%

Valuation

Exxon Mobil is historically cheap based on its P/E10 ratio. The P/E10 ratio is similar to the P/E ratio except it uses the 10 year average of annual earnings as opposed to the trailing twelve months. The P/E10 ratio works well for businesses with fluctuating earnings.

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Source: Ycharts

Most businesses today are overpriced due to the 5 year bull market brought about by artificially lowered interest rates. Low interest rates spur investment in real assets like stocks, pushing up prices. Exxon has by and large not participated in this rally and still appears to be a bargain.

Exxon's current P/E ratio is about in line with its competitors. The oil & gas industry as a whole does not have the same high valuation ratios that much of the market has at this time.

XOM

Exxon Mobil Corporation

13.90

RDS.B

Royal Dutch Shell plc

21.29

CVX

Chevron Corporation

12.83

PTR

PetroChina Co. Ltd.

11.00

TOT

Total SA

13.22

BP

BP plc

16.41

Source: Finviz

Consecutive Years of Dividend Increases

Exxon Mobil has paid increasing dividends for 32 consecutive years. The company's long streak of dividend payments is indicative of a strong competitive advantage.

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 percentage points per year. (Source)

Dividend Yield

Exxon has a current dividend yield of 2.69%, ranking it at 51 out of 120 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. (Source)

Payout Ratio

Exxon has a current payout ratio of only 26.50%. The company's low payout ratio gives it ample opportunity to increase dividend significantly faster than overall company growth over the next several years. Exxon ranks at 38 out of 120 businesses with 25+ years of dividend payments without a reduction based on payout ratio.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. (Source)

Long-Term Growth Rate

Exxon has managed to grow revenue per share at about 6.5% per year over the last 10 years. The company has achieved solid per share growth through both organic growth and share buybacks. Exxon ranks at 37 out of 120 businesses with 25+ years of dividend payments without a reduction based on this metric.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. (Source)

Long-Term Volatility

Exxon has a long-term standard deviation of 25.33%. The company's standard deviation is below average, but somewhat higher than other high quality dividend stocks due to Exxon's dependence on oil and gas prices. Exxon ranks at 45 out of 120 businesses with 25+ years of dividend payments without a reduction based on this metric.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011. (Source)

Conclusion

Exxon is the oil and gas industry leader. The company has a long history of rewarding shareholders and is very likely to continue to do so. Exxon's future growth is tied to increasing energy demands from rising populations and increased per capita GDP.

The company is a buy and the 7th highest ranked stock based on the 8 Rules of Dividend Investing. Exxon is a standout investment due to its above average dividend, long history of dividend payments, solid growth, and favorable long-term outlook.

Source: The Future Of Exxon