Right here and now, I'm going to ask you to answer an extremely hypothetical question:
If TimeTravel Inc., a purely made up company, could actually build a bona fide time machine -- one that worked and would send you back to the past -- would you go in order to pick up shares of your favorite stock in its heyday? Or, rather, would you just simply purchase a stake in TimeTravel Inc. during present time expecting massive future growth?
It may sound nuts, but I might just as soon stick with the present day. I mean, traveling back in time is so 90s, right?
While the scientific-types in the room continue to debate if it's even possible, I'll go out on a limb and say ExxonMobil (NYSE:XOM) might just fit the bill as a stock you might actually have a difficult time deciding over. Should I travel back in time to purchase it in the 80s or to just take the lazy man's route and purchase today for future growth?
Let's take a look at the financials ...
With $420 billion in annual revenue and $11 billion in cash on hand, XOM is sitting pretty. Though it's only sporting a 2.2% dividend, XOM's payout ratio is an extremely desirable 22% which means they surely can cover this dividend and definitely raise it in the future. $17 billion in debt is highly manageable and with a current and forward P/E of just over 10 and a PEG ratio of 1.18, it's difficult to argue XOM is significantly overvalued at this point. Better yet, with a history of raising dividends year-after-year since 1982, it's unlikely the dividend is in danger by any means.
So, how is it the ultimate dividend play?
Sure, I know it's not really a fair analysis having known what happened in the past, but if we hopped in a time machine and went back 30 years, we'd already know XOM was poised for an impressive history of dividend increases over the next three decades. In fact, XOM raised their dividend 6% annually over this time, literally crushing inflation, not to mention posting a split-adjusted 1,700% return on investment. Not too shabby if you ask me; those are certainly some impressive numbers. If you really think about it though, XOM's attractive valuation presents an opportunity for future investors as well. Who's to say they can't keep up the dividend pace for the future with such attractive present-day prospects? It's unlikely we'll see a 1,700% increase in share price in the near future, but isn't it reasonable to believe the dividend has some impressive room to run?
To be clear, I would agree the current dividend yield leaves a lot to be desired. I've often wondered how XOM manages to provide a paltry 2.2% dividend yield and 22% payout ratio without being pressured to increase payouts. I often ask myself why this yield isn't more attractive. For a company its size, they could definitely reward shareholders a little bit more. Come on ExxonMobil, don't make me point out ConocoPhillips (NYSE:COP) is yielding 3.7%, Chevron (NYSE:CVX) is offering 3.1% and Total (NYSE:TOT) is boasting 5.6%. Even BP (NYSE:BP) is dishing out 3.8% and we all know what kind of trouble they're in.
The bottom line
Sure, there is a list of oil companies out there which might produce superior dividend yields. You could even predict ExxonMobil's competitors will outperform while dishing out greater dividend payouts -- which may be entirely possible. However, it's rare to come across such a well-run company with an enviable history, a strong economic moat and an ability to generate astronomical profits with such consistency. Every investment inherently has risk, but choosing a well-run, moat-oriented, admired investment in XOM just seems as if we're diffusing a good deal of it. With such a moderate payout ratio and a slew of recent share buybacks to boost EPS, I think it's safe to say XOM will be a force to be reckoned with in the future and the dividend will continue to reward investors who are patient enough to continue to collect years down the road.
Despite the fact that my time machine question posed above was purely hypothetical, I feel very comfortable holding on to XOM for the next few decades, continuing to collect an increasing dividend and secure prospects for future growth. Call me crazy, but I feel just fine about the future of XOM and as a shareholder look forward to being rewarded for many years to come.