For several reasons, oil company stocks tend to have perpetually low earnings multiples. The price of their commodity product is volatile, their business is capex intensive, their asset base and capabilities are more important than their income in any one year, they're cyclical (resulting in especially low valuations during high periods) and they face a variety of worldwide risk.
The downside is that sometimes misleadingly low valuations can be bear traps. Smart money stays away from the top of a cycle, when earnings multiples are often at their lowest. The upside is that when cash is available and the management is willing, share repurchases can be fairly lucrative. Shares can be purchased at such a large quantity, that a meaningful percentage of market capitalization can be repurchased annually.
Share repurchases can make a good supplement to dividends when it comes to returning cash to shareholders, because the tax situation is better and it fuels future dividend and EPS growth. The potential abuse is that share repurchases can be performed for the wrong reason or at the wrong time: to boost company metrics and executive performance ratings.
Exxon Mobil (NYSE:XOM), with a dividend yield lower than most of its competitors, is sometimes considered stingy in comparison. But in contrast to other supermajors, XOM is surprisingly consistent and significant in its share repurchases. In addition to paying a mediocre dividend yield, XOM sends billions and sometimes tens of billions, to shareholders in the form of share repurchases. For XOM, I believe that their disciplined and regular approach to combining dividends and share repurchases serves investors well, although I'd prefer an extra point of dividend yield at the cost of some share repurchases.
This article showcases how XOM has returned cash to shareholders over the years. Between 2000 and 2010, the company reduced their number of outstanding shares by repurchasing and converting them to treasury shares.
XOM Shares Outstanding (millions)
Over this 10 year period, XOM reduced the number of outstanding shares considerably (and this includes the stock transaction for XTO).
The above chart shows the combined total value of dividends and share repurchases for each year.
The above chart shows the sum of dividends and share repurchases, as a percentage of the market capitalization during the year, for each year in the period. XOM sent anywhere between 3% and 10% of its total market cap back to investors each year.
During this 10 year period, XOM increased their total net income by a rate of 5.6% compounded annually and increased their total company annual dividend payout by only 3.3% compounded annually.
In contrast, during this same period, XOM increased their EPS by a rate of 9.3% compounded annually and increased their per-share annual dividend payout by 7.2% compounded annually. This is the result of their decade of share repurchases.
Overall, while I'd prefer XOM's yield to be an extra percentage point higher, I think XOM's steady and disciplined approach to repurchasing shares year after year combined with their dividend has resulted and likely will continue to result in reasonable long-term value creation for shareholders.
Disclosure: I am long XOM.
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