In 1911, the Supreme Court of the United States ruled that Standard Oil, the flagship petroleum company founded by the iconic John D. Rockefeller, would be broken up under the provisions of the Sherman Antitrust Act. Legend has it that Mr. Rockefeller, who was golfing in Ohio when he first heard the news, responded by saying, "Buy Standard Oil" as he lowered his head and then sank a ten-foot putt.
Fast-forward exactly a century, and we can see that Exxon Mobil (XOM) (the former Standard Oil of New Jersey) and Chevron (CVX) (formerly the Standard Oil of California) have become the most prosperous spin-offs of the original oil behemoth.
Even though Chevron Corp. has a market capitalization rate of over $180 billion, it has often had to play second fiddle to the much larger Exxon Mobil, capitalized at $350 billion. But that does not make Chevron an inferior investment. As Warren Buffett reminds us, "The investor of today does not profit from yesterday’s growth". After all, if Chevron were to double its market cap it would become the size of, well Exxon Mobil.
But if Exxon Mobil were to double its market cap, it would become a $700 billion company. There’s nothing to prevent that from happening of course, but Chevron’s smaller size ought to enable it to grow at a faster rate. Not only is Chevron currently trading at a lower price to earnings ratio, but it is also paying out a noticeably larger dividend than Exxon as well.
Let’s take a look at the numbers. Over the past five years, Chevron has been able to grow earnings at a 10% annualized pace, with the current analyst consensus rate of 10% growth annually for the next five years. Likewise, Exxon has seen its earnings grow at 10% for the past five years as well, with the current analyst consensus at 9.5% going forward through 2016. With Chevron shares trading at a trailing P/E of 8.14 and with Exxon shares slightly more expensive at 9.17, it would appear that Chevron shares possess the slight edge over the larger rival.
But I think that the best advantage Chevron has over Exxon lies in its dividend policy. Over the past five years, Chevron has been able to grow its dividend at 11% annually. In 2006, Chevron paid out $2.01 per share in dividends. After raising the quarterly payout to $0.78 in the second quarter of 2011, Chevron now boasts a $3.12 per share payout. In comparison, Exxon has grown its dividend 9.5% over the past five years, from $1.28 per share in 2006 to $1.88 going forward.
Chevron’s 1.5% edge, if maintained and reinvested over the next five years, might be more meaningful than you would initially think. If the past five years can serve as a rough proxy going forward, Chevron’s $3.12 per share payout would turn into $3.12*e^(.11*5)=$5.41 in the year 2016. If Exxon continues at the same pace, its per share payout would be $1.88*e^(.095*5)=$3.02 in five years.
Chevron shares currently trade at $93.29, and Exxon shares currently trade at $69.80. Based on this analysis, Chevron’s dividend would have an effective yield of $5.41/$93.29=5.79% in 2016, and Exxon’s effective yield would be $3.02/$69.80=4.3% in the year 2016.
Exxon does have the benefit of boasting a historically effective stock buyback program. Over the past decade, Exxon has been able to reduce total shares outstanding from 6.8 billion to 4.9 billion shares. Meanwhile, Chevron has only been able to reduce its share count from 2.1 billion shares to 1.9 billion over the past decade.
Although share repurchases are more tax efficient than paying out dividends, I usually prefer growing dividends because as the old saying goes: "Dividends are the financial equivalent of marriage, but stock buybacks are more like one-night stands".
If either Chevron or Exxon declined to initiate a buyback program and chose to deploy its capital elsewhere, hardly anyone would bat an eye. But if either Exxon or Chevron suspended their dividend payouts, you can bet your keister there would be a pretty strong backlash.
At this point, I don’t think you can go wrong purchasing shares of either Exxon or Chevron at today’s market prices. Both are compellingly priced at less than ten times trailing twelve-month earnings, and I wouldn’t bet on the price of oil being lower five years from now than it is today. Chevron’s dividend policy has impressed me more than Exxon’s these past five years, but Exxon’s stock repurchases over the past five years has been as impressive as anyone’s.
The old baseball slogan dictates that a tie goes to the runner, and I think in this case, Chevron wins the tie because its smaller size ought to give it more running room for growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
