Exxon Mobil: Undervalued Industry Leader With Large Growth Runway

| About: Exxon Mobil (XOM)


Exxon Mobil is the 2nd-largest publicly traded corporation in the world (behind only Apple).

The company has set the record for highest corporate profits in one year 5 times.

Exxon Mobil is the successor to perhaps the most dominant business of the last 200 years, Standard Oil.

The company has increased its dividend for 32 consecutive years.

Exxon Mobil posted strong earnings per share growth in its most recent quarter.

Exxon Mobil (NYSE:XOM) is the largest publicly traded oil and gas corporation in the world, and second-largest publicly traded corporation overall, based on its market cap of over $424 billion. Exxon Mobil's lineage goes back to the original dominant oil company: Rockefeller's Standard Oil, which was founded in 1870. In many ways, Exxon Mobil is the embodiment of Standard Oil today, albeit not as dominant. Exxon Mobil has the record for the highest profit ever recorded in any year by a corporation ($45.22 billion in 2008). The company is extremely profitable, and has a long history of rewarding shareholders through growing dividends. Exxon Mobil has increased its dividend payments for 32 consecutive years.

Source: Exxon Mobil Corporate History

Value In An Overvalued Market

The S&P 500's P/E ratio currently sits at around 19. The historical average P/E ratio for the market is about 15. There is no fundamental reason why the P/E ratio should be higher than average, as the US is not in a boom period and there are no extremely fast-growing industries that promise to grow the overall economy like the internet and computer industry of the late nineties. It is likely that near-record low interest rates have pushed the market significantly above its historical P/E levels.

Exxon Mobil has not taken part in the overall market rally. The company's P/E ratio sits at 13.37, well below the overall market level. The company's P/E 10 ratio, which measures the current price to the average of the company's earnings over the last 10 years, has barely recovered from the Great Recession of 2007 to 2009, and is well below the company's historical average. The P/E 10 ratio is more suitable than the P/E ratio for companies with fluctuating earnings, because it takes average earnings over a full 10-year period instead of earnings over the trailing twelve months, which may not be reflective of a business's underlying earnings power.

Source: YCharts

The Halfway Mark: Exxon Mobil's 2014 Second-Quarter Results

Exxon Mobil's earnings increased from $6.86 billion in the second quarter of 2013 to $8.78 billion in the second quarter of 2014. The company earnings increased in all 3 of its divisions: Upstream, Downstream, and Chemical.

Source: Exxon Mobil 2nd Quarter 2014 Presentation

The company's upstream division grew earnings by $380 million as compared to the 2nd quarter of 2013, not counting a large one-time gain of $1,190 million from asset sales in Hong Kong. Exxon's upstream division is responsible for the bulk of the company's profits. The second quarter of 2014 was no exception; the upstream division accounted for over 83% of income in the second quarter, while the downstream division accounted for about 8%, and the chemical division accounted for 9% of income in the period.

Source: Exxon Mobil 2nd Quarter Supplemental Information

Exxon Mobil saw production volume decrease 5.7% versus the 2nd quarter of 2013. Production volume was down due to the expiration of the company's Abu Dhabi onshore concession, which accounted for 3.4 percentage points of the 5.7% decline. The remaining 2.3 percentage point decline came from lower gas volume, which was partially offset by higher liquid volume (excluding impact of Abu Dhabi).

Source: Exxon Mobil 2nd Quarter 2014 News Release

Through the halfway mark of the year, Exxon Mobil has distributed $11.7 billion to shareholders in the form of dividends and share repurchases. In addition, the company has invested $14.2 billion into new and existing projects this year. Overall, Exxon Mobil has generated $29 billion in cash flow year-to-date. The company's strong cash flows give it the ability to pay dividends, repurchase shares, and invest in new growth projects.

Source: Exxon Mobil 2nd Quarter 2014 Presentation

Shareholder Returns

Over the last year, Exxon Mobil has reduced its share count by over 3% after accounting for share dilution. The company's strong cash flows from its operations will continue to be used to reward shareholders through dividends and share repurchases. Exxon Mobil currently has a dividend yield of about 2.8%. The company's net share repurchases and dividend yield give shareholders a return of about 6% per year, assuming the company has no organic growth.

Exxon Mobil's revenues have grown by about 4% per year over the last decade. If oil prices stay relatively stable, shareholders of Exxon can expect a return of at least 10% a year from dividends and share repurchases (6%) and organic revenue growth (4%).

Exxon Mobil appears to be undervalued based on its P/E 10 ratio (as discussed above). If the company reverts closer to its historical valuation levels, shareholders will see additional returns. Exxon Mobil's profits depend on the price of oil. If oil prices fall significantly, the company will have poor earnings. Alternatively, if oil prices rise (as demand for oil increased globally), then Exxon Mobil will see its profit margins rise in excess of organic growth, resulting in a higher CAGR for shareholders.

Future Growth Potential

Exxon Mobil's future growth will come from rising global energy demand. Global energy demand is expected to steadily trend upward due to population growth and rising GDP in developing markets. Demand growth from the population and broadening middle classes will be partially offset by efficiency gains from advancing technology. An example of this is the increases in fuel efficiency in the auto industry over the last twenty years.

Source: Exxon Mobil Outlook for Energy in 2040, page 11

Despite the popularity in renewable energy sources, oil and gas will provide the bulk of energy the world demands for the foreseeable future. Solar, wind, and biofuel energy sources are expected to grow at nearly 6% a year over the next several decades, compared to less than 1% and 2% average expected growth for oil and gas, respectively.

Source: Exxon Mobil Outlook for Energy in 2040, page 44

There is only a finite supply of oil and gas on earth. Technological advances have made it possible for Exxon Mobil (and its competitors) to find and produce oil that would have been impossible or uneconomical in the past. Examples of previously difficult or impossible production sites are the oil sands and various deep water sites around the globe. In addition, hydraulic fracturing (fracking) is creating a renaissance in the US oil industry.

Source: Exxon Mobil 2014 Annual Meeting Presentation, slide 18

Exxon Mobil's long-term growth outlook is favorable due to the expected demand increases in energy over the next several decades. The company will likely grow earnings per share faster than overall energy demand for 3 primary reasons.

First, as demand increases globally, it is likely that the long-term average price of oil will rise. This will cause Exxon's operations to become even more profitable than they are today.

Secondly, Exxon Mobil can grow faster than overall energy demand by gaining market share in the highly competitive oil and gas industry. Exxon Mobil is currently the largest publicly traded oil and gas company in the world, and has a history of outperforming its peers due to its incredibly efficient and disciplined upstream operation.

Finally, Exxon Mobil will likely see more efficiency gains resulting in higher long-term average profit margins as technology continues to improve.

Comparison to Other Consistent Dividend Payers

Exxon Mobil is the dominant player in the oil and gas industry, but how does it compare to other businesses with a long history of dividend payments? Comparing Exxon Mobil to other investment opportunities shows whether it is a solid investment within the oil and gas industry, or whether it is a favorable investment in light of other stock investment opportunities.

The 5 Buy Rules from The 8 Rules of Dividend Investing compare businesses with a long history of dividend payments to each other over several metrics that have historically been indicative of a high-quality investment.

Consecutive Years of Dividend Increases

Exxon Mobil has increased its dividend payments for 32 consecutive years. A long history of dividend increases is historical proof that a company has been able to grow profitably for several decades.

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: S&P 500 Dividend Aristocrats Factsheet, February 28, 2014, page 2

Dividend Yield

Exxon Mobil's dividend yield of 2.79% is the 56th-highest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's dividend yield is near its 10-year high due to the company's low valuation.

Source: YCharts

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: Dividends: A Review of Historical Returns

Payout Ratio

Exxon Mobil's payout ratio is only about 25% of earnings. The company's payout ratio is the 37th-lowest out of 132 businesses with 25+ years of dividend payments without a reduction. Exxon Mobil's low payout ratio gives it room to grow its dividends significantly faster than overall company growth for the next several years.

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: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Exxon Mobil has managed to grow revenue per share at over 6% per year for the last decade. The company has the 41st-highest growth rate out of 132 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Exxon Mobil has a long-term standard deviation of about 25%. The company's standard deviation is especially low for a businesses that is susceptible to oil price fluctuations. Exxon Mobil has the 48th-lowest standard deviation out of 132 businesses with 25+ years of dividend payments without a reduction.

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: Low & Slow Could Win the Race, page 3


Exxon Mobil is a buy, and the Top 10 stock this month based on The 8 Rules of Dividend Investing. The business does not stand out in any one metric, but scores above average in each category.

Qualitatively, Exxon Mobil has a long growth runway ahead of it from increasing global energy demand. Shareholders of Exxon Mobil may receive a CAGR of 10%+ with little risk of business failure. Exxon Mobil is the 2nd-largest publicly traded corporation, and has proven its business model over the last century.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.