Exxon Mobil: A Dividend Makes All The Difference

| About: Exxon Mobil (XOM)
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Summary

At the end of 2007, shares of Exxon Mobil were trading quite close to where they are today.

In turn you might suspect that the investment returns have been nonexistent.

This article highlights a variety of aspects detailing why that wasn’t necessarily the case.

At the end of 2007 shares of Exxon Mobil (NYSE:XOM) were trading hands around $94. As I write this the current quotation is also around $94. And for a good deal of people that might look like some sort of tragedy. Yet I would contend that this is a rather large leap before digging into a few counterpoints.

For one thing, a historical stock chart will detail pricing history, but it often leaves off the dividend component. For a company like Exxon that has not only paid but also increased its payout for decades, this addition can make a difference.

Here's a look at the per share payments over the years:

2008 = $1.55

2009 = $1.66

2010 = $1.74

2011 = $1.85

2012 = $2.18

2013 = $2.46

2014 = $2.70

2015 = $2.88

2016 = $1.48*

*Note that the last payment only includes half of this year.

While your capital appreciation would have been close to 0% over this time period, that's certainly not the same thing as generating a 0% overall gain. You would have also received $18.50 per share in dividend payments along the way. Your total value per share, prior to thinking about reinvestment, would have been about $112.50, representing a 20% overall gain or an annualized rate of about 2%. On a nominal basis, shares would have to trade in the $70's again to "break even."

Granted no one is celebrating a 2% annualized gain outside of a savings account, but it still illustrates the disparity between what you may observe and what actually occurred.

Moreover, this difference increases as you think about a common investor. Obviously a good deal of investors elect to receive Exxon Mobil dividends as cash and use those funds to spend as they please. However, a good portion of investors also choose to reinvest those dividend proceeds.

Here's a look at Exxon Mobil's year-end share price over the years:

2008 = $79.83

2009 = $68.19

2010 = $73.12

2011 = $84.76

2012 = $86.55

2013 = $101.20

2014 = $92.45

2015 = $77.95

Had you started with a $10,000 investment at the end of 2007, you could have purchased 106 shares of Exxon Mobil. If you simply collected the dividends, your liquidity bid (the price at which you could sell) would still be about $10,000, but you would have also collected nearly $2,000 in cash payments along the way.

Alternatively, you might have elected to reinvest. To keep the example simple, you might have elected to reinvest at the end of each year using the prices mentioned above. In this case you would have gone from owning 106 shares up to 130 shares by the end of 2015. The value of that stake would be closer to $12,400 (once you consider this year's dividend payments.) It's not a huge advantage, but it still highlights an advantage: you would have been able to reinvest at much lower prices over the years.

Some might have cheered for a constant $94 share price over the years or even a foray into the $100s had you known that the price would start and finish at the same level. That sort of thing might provide a short-term "warm and fuzzy" feeling of selecting a security that went up in price, but it would not have been better for your wealth creation. Just like purchasing bread at the grocery store, when you are buying more it's lower prices that ought to be more attractive.

Perhaps more pertinent for the income investor is the increase in income that can result from reinvesting. Had you owned 106 shares to start and not reinvested, your annual income would have gone from about $165 to $320 -- a sizable increase in line with per share dividend growth, despite the lack of share price growth. Alternatively, with reinvesting, your income could have jumped up to $390 or thereabouts. Both cases are important differences as it nicely illustrates the disconnect that can occur between share price performance and income growth.

Finally, the typical investor (especially one still in "working" years) does not usually make a single investment and then sit on their hands for years to see what happens. Although it's common to quote returns from one decade to the next, that's not a very realistic illustration of what actually occurs. Instead, investors contribute new capital frequently and over a great deal of time.

Let's see what that would look like. If instead of a single $10,000 investment, we'll think about investing $10,000 each year in Exxon Mobil at the above prices and reinvesting along the way. Don't get discouraged by the magnitude of the number. I could have just as easily used $1,000 or $100; the takeaway will be the compound return that results, which is not a function of the nominal amount invested.

Over the course of eight years, this would equate to a total of $90,000 in fresh capital invested. You would start with 106 shares and build this position to over 1,200 shares by reinvesting and adding new capital at prices in the $60s, $70s, $80s, $90s and even once in the $100s. The value of that stake, including this year's dividends, would now be around $116,000 (and in turn producing something to the tune of $3,600 in annual dividends).

Now from this information I'd like to make two observations. First, if you wanted to replicate that sort of return, it would require an average compound gain over the period of about 5%. Once again this is not a spectacular result, but it's important to remember that solid returns are mixed in with unimpressive ones.

Buying under $70 back in 2009 would have added greatly, while the purchase over $100 per share in 2013 would be thus far classified as a negative drag on the overall return. Still, it shows that consistently investing has generated greater wealth than what you might anticipate when you hear that the stock price started and ended at the same level.

The second note of interest is that this increased return benefit is a function of lower rather than higher share prices. Had the share price remained at $94 per share, today's total value would be closer to $100,000. An extra $16,000 (to go along with a lot more current income to boot) is a result of being able to add capital at lower rather than higher prices.

This sort of information can be helpful as you go about the investing world. When you see that Exxon Mobil was trading at the same level today as eight and a half years ago, you might suspect that the returns have been nonexistent. Yet that cursory glance ignores the idea of dividends, reinvestment and the ability to add new capital along the way.

Disclosure: I am/we are long XOM.

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.