It just might be that time of year to take a good hard look at purchasing the biggest of all the Standard Oil children, ExxonMobil (XOM). With Exxon trading at less than $70 per share, the fact that America's most profitable oil company is trading at less than 10x earnings ought to be catching your attention. While Wall Street generates plenty of headlines obsessing over the next big thing - be it Facebook, Zynga, or Groupon (GRPN), there are a handful of companies like ExxonMobil that churn out billions of dollars each year in profits, which ought to merit our attention as investors. One of Warren Buffett's most famous investing maxims is to 'look for companies that drown you in cash.'
Before we even take a look at the numbers, there are a couple of macroeconomic trends that make investing in big oil companies like ExxonMobil attractive.
First of all, we are often inundated daily (try pronouncing that ten times fast) with commercials and testimonials advocating the purchase of gold as an inflation hedge. Regardless of your investor sentiments on gold, there is no doubt that oil offers far more utility than gold. If you're convinced that the U.S. dollar is going to be worth less and less each year going forward as the Treasury continues to give the government's printing presses a workout, then there is no reason to suspect that the price of oil would not correspondingly increase. Further, as the demand for oil increases (be it from developing nations, rising populations, rising industrials needs, or eventual economic expansion), textbook economics would indicate that the price of oil ought to increase. The entire global economy needs Big Oil to function in day-to-day life, and the oil industry in particular has historically employed some of the best capital allocators in the world.
Which brings us to ExxonMobil, which is trading at an absurdly low rate of less than ten times earnings.
Over the past five years, ExxonMobil has grown at a 10.0% annual clip, with an average annual P/E ratio of 12. ExxonMobil's trailing twelve month's earnings per share is $7.61. If Exxon can continue to grow at the same pace as it did for the past five years (which could be possible if the price of natural gas climbs up from its historic lows or if the price of oil enjoys modest annual increases over the next few years), then Exxon would theoretically be earning $7.61*e^(.10*5)=$12.55 per share in earnings five years from now. And if Exxon trades at its historic P/E multiple of 12, then those shares would be worth $12.55*12=$150.60. At the current price of slightly less than $71, you ought to be able to roughly double your Exxon investment in about five years.
Furthermore, Exxon's dividend growth over the past five years has been quite impressive, growing at a 9.5% pace. Right now, ExxonMobil's current dividend is $0.47 per share quarterly. On an annualized basis, that comes out to $1.88. If Exxon can continue to grow its dividend at the same rate for the next five years, you'll be looking at $1.88*e^(0.095*5)=$3.02 per share in Exxon dividends five years from now. If you buy Exxon shares now at $71, five years from now, you could conceivably be enjoying a 4.25% yield on cost, which is actually quite tremendous considering that Exxon only pays out roughly 30% of its profits in dividends.
Furthermore, Exxon has engaged in an aggressive share buyback program over the past decade. In 2000, Exxon had 6.9 billion shares outstanding. In 2003, Exxon had 6.5 billion shares outstanding. And in 2006, Exxon had only 5.7 shares issued. By 2009, Exxon had only 4.7 billion shares outstanding. Exxon increased its shares outstanding to 4.9 billion in 2010 to complete the purchase of XTO energy, but these aggressive share repurchases have been generating significant value for Exxon shareholders. After all, every time the share count in Exxon drops, your overall ownership of the company increases, entitling you to a larger claim on the corporation's overall earnings. The company has indicated that it will buy 200-300 million shares over the coming year, and with the price of Exxon stock this low, the long-term value generated will most likely be rather significant. If you buy ExxonMobil now at $71, I would suspect that, dividends included, you will double your money by August 2016.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
