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While Exxon Mobil (NYSE:XOM) has been raising its dividend rate for 30 years in a row at an average annual rate of 5%, its dividend yield is not as impressive as dividend yields of other giant oil companies such as Total (NYSE:TOT), BP, Statoil (NYSE:STO) and ConocoPhillips (NYSE:COP). This has caused a lot of arguments in the last several years, and many people argued that Exxon needs to pay more to its investors in the shape of dividends. As a shareholder of Exxon Mobil, I also like the idea of a higher dividend yield, however I wouldn't be too upset if the company continued its current dividend practices either.

Exxon Mobil spends a significant portion of its earnings in stock buybacks. These buybacks are not appreciated by some investors as much as they should because the returns resulting from buybacks are not as visible as dividend payments. Ten years ago, Exxon Mobil's net income was around $4 billion. Today the company's net income is near $10 billion. Without stock repurchases, we are looking at an earnings growth of 250% in 10 years, which translates into 25% per year (non-compounded, for sake of simplicity). This is not bad at all, however it gets better when we include stock repurchases into the calculation. Ten years ago, Exxon Mobil had 6.78 billion outstanding shares. Today it has 4.71 billion shares outstanding. This means that in the last decade, the number of XOM shares outstanding decreased by almost half. This means even if the company's value were to remain flat, each share's value would increase by 50%. If you divide a $400 billion company into 400 billion pieces, each piece is worth $1, but if you divide the same company into 200 billion pieces, each piece will be worth $2 instead. As a result, Exxon Mobil's EPS grew from $1.68 to $8.28, an increase of 393%. This is obviously much better than 250%.

During the same period, Exxon Mobil's share price increased from $40 to $87. This is a growth of 118%, which translates to compounded return of 8% per year. Given the number of stock buybacks, 2% of the annual compounded-growth can be attributed to stock buybacks. Earning an extra 2% due to stock buybacks is better than getting an extra 2% in dividends because dividends get deducted from a stock's share price; however capital appreciation never gets deducted from anything.

If you bought shares of Exxon Mobil 10 years ago, held it until now and reinvested the dividends, your total return would have jumped another 27% due to reinvestment of dividends. This would increase your total return to 149.86%. Now we are looking at an annual compounded return of almost 10%. This is a much better return than most of Exxon's competitors.

You are still not happy? You can always sell covered calls on your stock holdings. Exxon's calls with a strike price of $90 expiring at the end of the year trade for a premium of $3.10. This is a yield of 3.56% for eight months on top of the 2.62% the stock is yielding.

In conclusion, Exxon Mobil's investors have nothing to complain about. Stock buybacks are as important and valuable as dividends, even though they are less visible to investors. I like Exxon Mobil and the way it has earned me money over the years.

Source: Not Happy With Exxon's Yield? Let's Look At It This Way