by Dividend Growth Investor | August 17, 2012 9:09 am
Exxon Mobil (NYSE:XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend aristocrat has paid dividends since 1911 and increased distributions on its common stock for 30 years in a row.
The company’s last dividend increase was in June 2012 when the Board of Directors approved a 21.30% increase to 57 cents per share. The company’s largest competitors include Chevron (NYSE:CVX), British Petroleum (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.B).
Over the past decade this dividend growth stock has delivered an annualized total return of 11.50% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 20.10% per year. Analysts expect Exxon Mobil to earn $7.83 per share in 2012 and $8.44 per share in 2013. In comparison Exxon Mobil earned $8.42 per share in 2011.
The company plans to spend $37 billion per year in capital spending over the next five years. The company is targeting over 22 projects, that will deliver 1 million BOE per day by 2016. The major projects that are expected to be brought online include Kashagan Phase 1 project in Kazakhstan, Kearl Oil Sands Project in Canada as well as a few in Africa.
Its recent deal with Rosneft to explore in the Arctic and Black seas could generate long-term dividends for the corporation, which has tried to do business in Russia for years.
The company has also tried to increase its exposure to Natural Gas, through its E&P activities as well as acquisition of XTO Energy in 2010. Unfortunately, natural gas prices have remained in the doldrums, which would affect profitability negatively.
In addition, there are few factors that could lead to increase in natural gas prices in the America’s. One bright spot however includes the fact that foreign natural gas prices are more robust than the U.S. ones.
Over the past fifteen years, the company has consistently added to its refining capacity. Refining however is a cyclical business that is mostly been seen as a cash cow for major integrated producers over the past few years.
Exxon is one of the most consistent repurchasers of stock I have seen, dedicating $5 billion per quarter for this activity. As a result, the number of shares outstanding has decreased from 6.954 billion in 1999 to 4.716 billion in 2012.
However, this has resulted in a stingy dividend payout policy, and below average yields compared to its peers. The company has been able to purchase a large quantity of shares without looking at price, and I have argued that in essence shareholders would have been better off just receiving special distributions.
The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2002 and 2007, and then dipped in 2009, before rebounding strongly. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 7.40% per year over the past decade, which is much lower than to the growth in EPS.
A 7% growth in distributions translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1974 we see that Exxon Mobil has actually managed to double its dividend every nine and a half years on average.
The dividend payout ratio has remained below 50% for the majority of the past decade. Exxon Mobil has a stingy dividend payout, and instead focuses its excess cash flows towards stock buybacks. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Exxon Mobil is attractively valued at 9.20 times earnings, yields 2.60% and has an adequately covered dividend. Unfortunately, I find other companies such as Chevron better values at the moment, which is why I do not plan on adding to my Exxon position significantly over the next year.
Full Disclosure: Long CVX, XOM and RDS.B
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