On June 30, 2011, Marathon Oil (NYSE:MRO) completed the spinoff of its downstream business, Marathon Petroleum (NYSE:MPC). In the nine years since owners of MRO stock haven’t fared all that well.
Here’s a look back at the damage.
Which is the Better Buy: MRO Stock or MPC Stock?
As I write this, Marathon Oil is trading just under $4 and has a market capitalization of $3.12 billion. Its former stablemate is trading around $27.50 and has a market cap of $17.93 billion.
Year to date through Sep. 30, MRO has a total return of -69.5% while MPC is down 48.4%. Marathon Oil is severely underperforming a struggling industry, while MPC is keeping pace with its peers. Neither group of shareholders are very happy. That goes double if you’ve held MRO stock since it completed its spinoff all those years ago.
Marathon Oil shareholders got one share of Marathon Petroleum for every two shares held in the oil producer when the spinoff was completed. Marathon first announced the deal in January 2011. MRO stock was trading around $43 a share at the time. By the time the spinoff was completed, it had risen to $52.68. The next day, it opened trading at $32.95, which reflected the spinoff of Marathon Petroleum.
For this article, let’s assume that you owned 1,000 shares of Marathon Oil pre-spinoff. Assuming you held both stocks– how much is your $43,000 investment worth today?
What’s It Worth Today?
Well, your MRO stock is worth around $4,000 or $4 per share. Of course, until the company suspended its quarterly dividend in May, it made a quarterly payment to shareholders. In the two quarters of 2011, post-spinoff, its quarterly dividend was 15 cents. From 2012 through its dividend suspension, it paid out cumulative dividends of $3.77 a share.
So, the dividends would be worth $3,770 for a total of $7,770.
Of course, shareholders also got one share of MPC for every two MRO shares, which works out to 500 shares in the refiner. On June 11, 2015, Marathon Petroleum carried out a 2-for-1 split. So, today, those 500 shares are now 1,000. It, too, paid dividends post-spinoff.
In 2011, it paid two quarterly dividends of 20 cents and 25 cents. In 2012 through the stock split, it paid a total of $2.45 a share on 500 shares. Post-split, it paid out $8.86 a share based on 1,000 shares.
So, Marathon Petroleum’s 1,000 shares are worth $27,500. Add in $10,310 in dividends [500 multiplied by $2.90 plus 1,000 multiplied by $8.86], and you get $37,810.
Drum roll, please.
The $43,000 investment in MRO stock in January 2011, including dividends, is today worth $45,580, a compound annual growth rate of 0.6%. By comparison, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has generated an annualized total return of 13.6% over the past decade.
I guess that’s why Warren Buffett recommends most people buy a low-cost S&P 500 index fund.
The Value Extraction Isn’t Done
On Oct. 1, Marathon Petroleum announced it would cut 12% of its workforce due to lower gas consumption resulting from the novel coronavirus and Covid-19. However, none of its employees at the company’s Speedway gas stations and convenience stores will be affected.
That’s because, in August, Marathon Petroleum agreed to sell Speedway to Seven and I Holdings (OTCMKTS:SVNDY), the parent company of 7-Eleven. It operates 21,000 convenience stores in Japan and another 9,800 in the U.S. and Canada. With Speedway’s addition, its North American business would add 4,000 stores, giving 7-Eleven a presence in 94% of the top 50 cities in the U.S.
Marathon Petroleum had planned to spin-off Speedway as part of a plan to appease activist investor Elliott Management. Instead, the $21-billion sale to 7-Eleven’s parent gives it some breathing room by allowing it to pay down some of its debt. At the end of the second quarter, it had $30.5 billion in total debt.
Since the deal was announced, MPC shares have fallen by about 25%. However, the sale ensures it maintains the 58-cent quarterly dividend, which is currently yielding 8.4%.
Despite the fall in its share price in 2020, in hindsight, Marathon Oil shareholders would have been wise to sell their MRO stock post-split and reinvest the proceeds into MPC.
An even better plan would have been to sell both and buy SPY instead, but that’s water under the bridge.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
