Last weekend I sat down to enjoy a rather rare and relaxing breakfast with my parents at their beautiful country home in San Diego. After dutifully chopping the fresh vegetables and carefully cracking the eggs my mother brought out from the refrigerator, I made a comment about the familiar-looking iron skillet she was warming on the stove. I remember it well from growing up and, as it turns out, that same iron skillet has been in our family for nearly 70 years. Talk about return on investment; it wouldn't be a stretch to presume we've used this exact same cookware at least 15,000 times over the life of this skillet.
As I stirred the veggies around in the iron skillet, just prior to adding a few eggs, I couldn't help but wonder if there are investors out there who could claim the same thing. You know -- owning shares of a stock of a particular company that had been in the family for decades or perhaps even generations. Despite this world of technical analysis junkies and robo-traders, it's certainly a possibility, is it not? And I don't mean to insinuate other investing strategies are inferior, but isn't it endearing to meet a shareholder who has held a particular stock in the family for generations? It's always a treat to hear them share their stories.
Though I'm a pretty young guy myself, I'd venture to say that ExxonMobil (XOM) is one of those stocks that retirees and nostalgic stock owners alike love to reminisce about. In the comment section of many of my previous articles, I've heard the Seeking Alpha community say things like:
"Yes, there were some stocks that have gone up more than Exxon in the past 50 years, but not many. I think it is a buy and hold forever stock."
"By the way, as someone who has followed the oil prices for 40 years, XOM is the most cost-conscious, the most disciplined, and the most no-BS-in-how-they -conduct-their-business of the companies among their peers."
"Exxon is it. If you have no other equity, own this stock. My mom taught me. I've taught both my children. Buy and hold XOM."
Those are some rather impressive historical recommendations for buying XOM. But does everyone feel this way?
The answer is, undoubtedly, no. Nowadays we seem to have a growing group of individuals who feel disillusioned with ExxonMobil because its dividend yield is lower than the industry standard. XOM currently offers a 2.2% yield. That's not very impressive, seeing that ConocoPhillips (COP) is offering a 3.5% yield, BP plc (BP) is dishing out a 4.3% yield and Chevron Corporation (CVX) is paying out about 3.0%. Moreover, with a payout ratio of only 22%, I have to ask: Why so stingy, XOM? Don't you understand investors are passing you up because they don't feel buybacks are more worthwhile than a high dividend yield?
Let's get down to the "nitty gritty" and talk about share repurchases, shall we?
ExxonMobil is somewhat unique compared with the aforementioned companies in that management prefers to return a significant amount of cash to shareholders in the form of share buybacks rather than dividend payments. This can potentially improve tax scenarios for investors though it's reasonable to argue XOM might possibly buy back these shares at the wrong time, thereby paying higher prices than it should. Though this hasn't necessarily been the case in the past, it's difficult to predict what the future holds. After following the company for a few years and keeping my ears to the ground, I think it's safe to say the majority of investors would prefer to have a higher dividend yield rather than the benefit of share buybacks.
XOM currently boasts a $410 billion market cap, a forward P/E under 10, $433 of annual revenue, $12.5 billion cash on hand, $17 billion in debt, a beta of 0.57 and has returned a mere 2.3% YTD while the S&P 500 (NYSEARCA:SPY) has rallied 12.0%. Though Warren Buffett chose to sell out his entire arsenal of XOM stock not so long ago, I believe there may be more potential value locked into the shares and I feel quite comfortable holding onto mine in my investment accounts.
ExxonMobil continues to impress me with growth in revenue, an overall attractive valuation and a favorable financial situation including a reasonable amount of debt and an enviable hoard of cash on hand. XOM's current debt to equity is right around 0.11, meaning the management of debt has been considerably successful. Return on equity exceeds the figures from the same quarter last year prior and -- despite XOM's share price not moving north significantly over the past year -- with current estimates stating our energy demand will increase by 40% over the next 20 years, it's not unreasonable to believe XOM might benefit from this height in demand.
Though it's not necessarily safe to assume any company that has been around for generations will continue to prosper forever, ExxonMobil isn't showing me any signs that it's floundering in this economy or has plans to roll over in the near future. The rise in energy demand over the next few decades should help XOM significantly and if it continues to raise dividends while following its history of performing rather timely share repurchases, I'll continue to side with the faithful XOM-loving Seeking Alpha community rather than Buffett and claim the stock to be an intelligent investment.
It's because of the reasons I've stated above that I dub ExxonMobil to be the 'Iron Skillet' of investments. The company has been here for generations and will likely continue to thrive for many years to come. Think I'm wrong? Feel free to "grill" me in the comment section below. Just remember to be nice -- I am holding a 70-year old iron skillet in my right hand after all...