Patience in my view is the key trait for the long-term investor. Too often we are bombarded by a flurry of advice to buy and sell various securities. The consistent turnover of one's portfolio is often detrimental for the creation of long-term wealth as the transaction costs often eat into the incremental gains made. To further compound the issues, the rapid turnover prevents the magic of compounding to take place. In the article below, I will detail the recent new highs made by the venerable Exxon Mobil (NYSE:XOM). The article will focus on the long-term gains one can expect from the simple act of holding the equity and simply allowing the dividend to reinvest.
I acquired my stake in XOM in April of last year at a bargain price of $87 per share with the intention of holding for an extended period of time, quite possibly forever. I detailed my initial thesis in an article that can be viewed here. What attracted me to the shares was XOM's consistent dividend increases coupled with share reductions. XOM was very consistent, repurchasing shares every quarter while steadily raising the dividend every year. XOM carried a triple AAA credit rating which further added to the appeal of the company. The shares were trading at less than 12 times that year's expected earnings.
The Street was marking the shares lower, as they fretted about the sustainability of asset sales which were used to reduce the shares outstanding. The Street was further penalizing the company for the grave sin of showing a year-over-year drop in earnings. Notice the myopic ways of the Street, instead of focusing on the long-term picture they were complaining about short-term issues while losing sight of the big picture.
Unbeknownst to most at the time, the greatest living investor Warren Buffett began to acquire a stake in the company. Mr. Buffett is a long-term investor who is known to take the longer-term view of companies. He has proven time and again to have an almost uncanny ability to enter into positions at an opportune time before a company's fortunes turn. It seems Mr. Buffett's timing is impeccable once again. The purchase of XOM was conducted in the second quarter of 2013 at a price between $86-$92 per share.
XOM has badly lagged the S&P 500 index over the past 3 and 5 years as the company readjusts its business mix. Interestingly, on the inside cover of the 2013 annual report there is a wonderful bar graph which depicts XOM performance versus the SPY and other integrated oil companies. XOM easily outpaced both. The question facing current investors is, can XOM once again produce this kind of outperformance?
In my view, the answer is a resounding yes as I will detail below. The two metrics that I will use to measure XOM effectiveness is the Return on Invested Capital (ROIC) and Return on Equity (ROE). XOM 2013 ROIC is an absolutely stellar 18.2% which is well above their cost of capital. As we can see from the graph below, capital that is reinvested back into the business generates an above average return. The 2013 number is one of the weaker numbers posted over the past ten years.
ROE in 2013 came in at a robust 18.7%. XOM has consistently outpaced its rivals in this key area which in my opinion led to its 20-year outperformance. I have no doubt this tidbit piqued Warren Buffett's interest when he acquired his stake. As we can see from the chart below, ROE is on the lower end of the range yet still quite robust.
With the above backdrop in mind, what can we expect from XOM going forward. XOM in my opinion has begun to catch up to the performance of SPY. It is still underperforming yet it will shine once the market begins to hit turbulence and investors begin to flock to the defensive names. I expect XOM to continue to raise its dividend at a Compounded Annual Growth Rate (CAGR) between 8-12% while reducing the shares outstanding by 1.5-2% per year. As long as oil prices remain steady and we don't enter into a worldwide recession, earnings should maintain an upward bias. Incidentally, the one year where oil prices collapsed, XOM earnings sharply rebounded two years after the initial drop. During that time the dividend along with its annual hike continued unabated.
I suspect the simple act of reinvesting the dividend and holding the shares will lead to a very acceptable total return over the balance of the rest of the decade. The defensive nature of the shares should allow them to hold up far better in a turbulent market then some of the market darlings of today. By going down far less in a down spike than the overall market will allow the shares to outperform over a longer period of time. This is the secret to Warren Buffett's stellar track record, as Berkshire Hathaway (NYSE:BRK.B) tends to hold up far better in a down market. When compounding over a long period of time, having a minimal drawdown will greatly enhance your chances of outperforming. The number one rule of investing is "never to lose money" with the second rule being to never forget rule number one. I would like to thank you for reading and I look forward to your comments.
Disclosure: The author is long XOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.