Exxon Mobil: Merits Of A Stock Purchase Program

Oct.16.12 | About: Exxon Mobil (XOM)

Exxon Mobil Corporation (NYSE:XOM) pays a relatively paltry 2.6% forward dividend yield that is substantially lower than many of its competitors, including Chevron Corporation (NYSE:CVX) at 3.4% and Total SA (NYSE: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:

Capital Returned to Common Shareholders
Year Net Common Stock Acquired ($Millions)

Total Common Dividends Paid ($Millions)

Total ($Millions) % Dividends
2012 10,630 4,878 15,508 31%
2011 21,131 9,020 30,151 30%
2010 12,050 8,498 20,548 41%
2009 18,951 8,023 26,974 30%
2008 34,981 8,058 43,039 19%
2007 30,743 7,621 38,364 20%
2006 28,385 7,628 36,013 21%
Click to enlarge

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. (NASDAQ: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:

  1. The value captured by purchasing the stock which compares the price paid to the current price.
  2. The difference between the price paid for each month and the lowest closing price during that month (could they have done better)
  3. 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:

Monthly Common Stock Purchases
Period Shares Purchased Price paid per share ($) Total Purchase ($ millions)
June, 2012 20,582,440 81.53 1,678
May, 2012 21,049,962 82.90 1,745
April, 2012 18,687,988 85.03 1,589
March, 2012 23,309,221 86.02 2,005
February, 2012 21,269,601 85.50 1,819
January, 2012 21,896,469 85.88 1,880
December, 2011 22,796,769 81.40 1,856
November, 2011 23,409,517 77.67 1,818
October, 2011 22,659,131 77.15 1,748
September, 2011 24,576,599 72.44 1,780
August, 2011 26,667,467 73.17 1,951
July, 2011 21,013,102 82.63 1,736
June, 2011 24,873,065 80.02 1,990
May, 2011 23,061,621 82.40 1,900
April, 2011 19,040,697 85.14 1,621
March, 2011 25,124,067 83.29 2,093
February, 2011 20,684,993 84.02 1,738
January, 2011 23,616,900 77.17 1,823
Click to enlarge

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.

Purchase Price Comparison
Period Price paid per share ($) Average Close for the month Average Daily Low Price Price Paid/Average Low premium
June, 2012 81.53 81.66 80.85 0.8%
May, 2012 82.90 82.81 82.27 0.8%
April, 2012 85.03 85.06 84.43 0.7%
March, 2012 86.02 86.13 85.50 0.6%
February, 2012 85.50 85.57 84.96 0.6%
January, 2012 85.88 85.96 85.31 0.7%
December, 2011 81.40 81.76 81.15 0.3%
November, 2011 77.67 77.73 77.00 0.9%
October, 2011 77.15 77.40 76.38 1.0%
September, 2011 72.44 72.40 71.47 1.4%
August, 2011 73.17 73.21 71.97 1.7%
July, 2011 82.63 82.74 82.19 0.5%
June, 2011 80.02 79.89 79.31 0.9%
May, 2011 82.40 82.43 81.61 1.0%
April, 2011 85.14 85.34 84.58 0.7%
March, 2011 83.29 83.16 82.51 1.0%
February, 2011 84.02 84.15 83.24 0.9%
January, 2011 77.17 77.35 76.61 0.7%
Click to enlarge

Source: SEC Filings, Yahoo!Finance, author calculations

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:

Avoided Dividends
Period Shares Purchased Avoided Dividends to Date Total Value ($ millions)
June, 2012 20,582,440 0.570 11.7
May, 2012 21,049,962 0.570 12.0
April, 2012 18,687,988 1.140 21.3
March, 2012 23,309,221 1.140 26.6
February, 2012 21,269,601 1.140 24.2
January, 2012 21,896,469 1.610 35.3
December, 2011 22,796,769 1.610 36.7
November, 2011 23,409,517 1.610 37.7
October, 2011 22,659,131 2.080 47.1
September, 2011 24,576,599 2.080 51.1
August, 2011 26,667,467 2.080 55.5
July, 2011 21,013,102 2.550 53.6
June, 2011 24,873,065 2.550 63.4
May, 2011 23,061,621 2.550 58.8
April, 2011 19,040,697 3.020 57.5
March, 2011 25,124,067 3.020 75.9
February, 2011 20,684,993 3.020 62.5
January, 2011 23,616,900 3.460 81.7
Total 404,319,609 812.6
Click to enlarge

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.

Conclusion

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.