I would like to increase the diversification of our portfolio of superior dividend yielding stocks. To that end, I am trying to find an energy stock to fit that bill. I am hoping that **Exxon Mobil Corporation** will be that company. It trades on the NYSE under the symbol (NYSE:XOM).

Let’s have a look and see if we have found a winner.

**Company Profile:**

From Yahoo Finance

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas.

It also engages in the manufacture, transportation, and sale of petroleum products and petrochemicals, as well as participates in electric power generation. The company manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and other specialty products. Exxon Mobil also has interests in electric power generation facilities. In addition, it holds license to explore gas in the Gorgon liquefied natural gas project for domestic supply.

Market capitalization is $461.62B.

**Company Fundamentals:**

Management has definitely delivered on the return on invested capital [ROIC] - especially over the last 4 years. ROIC has typically been in the mid-teens. However, in the last 4 years, it has been steadily increasing with the ROIC reaching 32.8% in 2006. Would record high oil prices be contributing? I think so.

Return on equity has also been improving. The 10 year average ROE is 21.22%. The 5 year average ROE improves to 24.25%.

Equity growth rates have been erratic over the last 10 years. In 1998 and 1999, equity growth rates were a mere 1.37% and 1.24% respectively. In 2003, the growth rate was 22.96%. The 9 year average growth rate is 10.06%. The 5 year rate increases to 14.33%. The 3 year rate holds steady at 13.31%. And last year’s growth rate drops to 9.61%.

Earnings per share growth rates have handily outpaced the equity growth rates. The 9 year rate is 18.51%. The 5 year rate jumps to 30.27%! The 3 year rate beats that at 36.57%. Last year’s rate has settled back down to 22.43%.

Sales growth rates have been rather volatile from a low rate of -16.28% in 1998 to a high rate of 59.77% in the very next year. Interestingly enough, last year, the growth rate was a mere 2.09%.

**Dividend Fundamentals:**

The current dividend yield is 1.62%. That is below the dividend yield of both the S&P 500 Index (1.99%) and the DJIA (2.37%).

I would like to see a dividend growth rate that compensates for this low yield. However, the dividend growth rate has been fairly erratic. In fact, from 1998 to 2002, the dividend growth rate was quite anemic. It began to improve in 2003 and 2006 has been the best year so far for a dividend increase in the last 10 years. The 9 year rate is 4.92%. The 5 year rate moves up to 7.18%. The 3 year rate is 9.13% and last year’s rate was 12.28%.

The dividend payout ratio has jumped all over the map from a low (and current) 19.54% to a high of 70.17%! The payout ratio has been steadily decreasing since 2002.

Cash flow growth rates showed no less than 4 years with negative growth rates. Of course, those were all early on. Cash flow growth rates in the last 4 years have been stupendous with a 4 year average rate of 32.12%.

So far, nothing really jumps at me as a dividend investor, except for diversification. Let’s press on.

**Valuation Models:**

Let’s use our 3 models to come up with a fair price for this stock.

Looking at 10 years worth of dividend yield data, I can see that this stock has been very consistent. The 10 year average high dividend yield is 2.74%. The 5 year average high dividend yield is 2.69%. That implies that the current 1.62% pales in comparison to the historical norms. If I demand 2.74% dividend yield, then my model price works out to $51.07. At the current price of $86.31, Mr. Market is demanding a premium of 68.99%!

Mr. Graham would say that we were pretty close to his estimate as well. The Graham number works out to $55.30 or a premium of 56.07%.

For our discounted present value method, I used the following inputs:

- future EPS growth rate of 7% (I had initially determined a future EPS growth rate of 10.06% by looking at the historical equity growth rates. However, I used the analysts more conservative forecast of 7% instead.)
- future P/E of 12.62 (This is the current P/E and is slightly lower than the 5 year average P/E of 13.8.)
- dividend yield of 2.74%
- future dividend growth rate of 7.18% (the 5 year average dividend growth rate.)

With this information, my model price works out to $58.85 or a premium of 46.67%.

Here is my dividend analysis of XOM.

Here is the 1 year stock price chart:

This chart definitely has a nice trend.

**Conclusion:**

Is this stock worthy of being in our portfolio of superior dividend yielding stocks? At least to add some diversification to our portfolio? On its own, I would say no. But for the diversification, it just might do.

However, all 3 model prices concur that this stock appears over valued. And not by a small amount either. So for now, I’ll sit back and watch and ponder. And if it ever gets near my model price, I’ll have to think hard and fast. In the meantime, I’ll continue my search for an energy company that belongs in our portfolio.

**Full Disclosure: **I do not own shares in XOM.