Exxon Mobil Corporation (XOM) pays a relatively paltry 2.6% forward dividend yield that is substantially lower than many of its competitors, including Chevron Corporation (CVX) at 3.4% and Total SA (TOT) at around 5%. At least, it is above the broader market. However, XOM has a very strong track record of stock purchases. The following chart shows the recent stock purchases in comparison to dividends paid:
|Year||Net Common Stock Acquired ($Millions)|
Total Common Dividends Paid ($Millions)
|Total ($Millions)||% Dividends|
Source: SEC Filings, Author Calculations. 2012 results reflect the first 6 months. Dividends include only dividends to common stock shareholders and exclude noncontrolling and minority interests. Net common stock include purchases reduced for sales.
One can clearly see two trends in this table. The first is stock purchases appear to be the preferred way for XOM to return capital to shareholders. However, the second observation is pretty obvious, that if there are reductions in total capital returned, those reductions hit stock purchase programs long before a company would contemplate a dividend reduction.
The Case For and Against Stock Purchases
Stock purchases provide a way to directly return capital to the collective shareholders without creating the tax liability of a dividend. Only investors who choose to sell their shares will potentially have a tax liability, some might even have a tax benefit. In contrast, dividend payments go to all shareholders and create a tax liability for everyone holding the shares in a taxable account. While the rate for qualified dividends is typically just 15%, that is still a tax payment. The other benefit that stock purchases have over dividends is that they provide more flexibility. Reducing a dividend or even not maintaining a consistent growth trajectory is widely viewed as a negative sign. However, it is much less apparent when a company slows down its buyback program. There are some indirect benefits as well, which include boosting EPS and reducing the future amount of dividends that have to be paid. The counter to this is that when evaluating a company's EPS growth it is important to see what portion of that growth is from stock purchases and what portion is from true growth in overall earnings.
However, there are also arguments against stock purchases. When a company, think Netflix Inc. (NFLX) purchased shares at a high price and that price in future declines substantially, the company has essentially destroyed shareholder value. This is no different than when a company purchases any asset only to discover that it overpaid. The other challenge is that stock purchases seem more common when things are going well and the outlook is positive. This strikes as potentially creating a bias towards stock purchases that tend to be at least slightly overpriced. In tough times, which can often correspond to lower stock prices, companies often hoard their cash.
Did Exxon Mobil overpay on its stock purchases?
So the question is whether XOM overpaid for its recent stock purchases. I will compute three things:
- The value captured by purchasing the stock which compares the price paid to the current price.
- The difference between the price paid for each month and the lowest closing price during that month (could they have done better)
- The value of the dividends that were not paid since those shares were repurchased.
These three metrics should provide a good starting point for considering whether XOM has done a good job with its stock purchases. The following table summarizes XOM's stock purchases (without adjustments for stock sales) for the last 18 months:
|Period||Shares Purchased||Price paid per share ($)||Total Purchase ($ millions)|
Source: SEC Filings, Author Calculations
The first check is a straight-forward calculation that compares the gain from the purchase price to the recent closing price of $91.03. This shows that these purchased shares would now be worth $4,034 million more. In comparison, this is approximately 1% of XOM total market capitalization.
The next check is comparing the price paid to the market price.
|Period||Price paid per share ($)||Average Close for the month||Average Daily Low Price||Price Paid/Average Low premium|
This table is looks good, but is actually not surprising. XOM is basically paying a relative market average price for its shares. On average, each day, XOM is purchasing 1 million shares. Some days, this could be over 10% of the total trading volume. XOM is often getting a price somewhat above the daily low by 1%, a figure often right near the closing price. However, with the relative volume being purchased, it is pretty hard for it to be substantially different from any price throughout the day. The more important analysis is to look at purchases across years. Prior to the financial crisis, it appeared that XOM was purchasing substantially more shares than it is today.
The third and final point requires the most calculation. For shares purchased in January 2011, XOM did not have to pay the last seven quarterly dividends or $3.46 per share. I've assumed that shares purchased in February were eligible for the Q1 2011 payment with ex-dividend date on the 8th. However, they avoided the last six quarterly dividends, totaling $3.02. This process can be repeated for each tranche of stock purchases and produces the following table:
|Period||Shares Purchased||Avoided Dividends to Date||Total Value ($ millions)|
Source: Yahoo!Finance, SEC Filings, Author Calculations
So this shows just over $800 million in savings on avoided dividend payments. One should note that this would be a little lower due to stock sales; however these sales represent just a few percentage points of the volume of shares purchased. This equates to a $20-30 million reduction in the savings.
XOM has a clear preference for stock purchases over dividends. Since its stock has been a relative consistent performer, these purchases have created some additional gains for the company in addition to reducing the amounts of dividends paid out to common shareholders. This provides shareholders with a balanced approach to the distribution of excess capital. However, with $18 billion of cash on its balance sheet, perhaps XOM could be a little more generous to its shareholders.
Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.