Exxon Mobil (XOM – Free Value Line Research Report for Exxon Mobil) is a giant in its industry, as the Business Description notes. While being so large affords the oil and gas giant some level of diversification with regard to the sources of its products, it does little to protect it from the often-violent swings in the commodity prices of the products it produces.
A quick look at the historical portion of the Statistical Array highlights the impact that oil and gas prices can have on Exxon Mobil. In 2008, the company earned $8.69 per share. Just one year later, following a large drop in commodity prices, share net was only $3.98. That’s a big drop and one that Exxon weathered better than many of its competitors. Still, such exposure to a market driven commodity poses material risks to a business.
How, then, does Exxon manage this exposure and still reward shareholders?
One important way, as noted above, is its diversification. It has operations around the world and the scale to focus on the regions and business opportunities that management believes will be most beneficial over the long term. This can include moving aggressively into areas through acquisitions like the XTO Energy purchase in 2010 that materially increased Exxon’s natural gas business. This move was made because of the long-term potential of natural gas, however, as that commodity is mired in a long price slump driven by increased supply. Simply put, the oil giant can throw its weight around, to some degree, in an effort to better position itself for the future.
Another way in which Exxon rewards shareholders is by keeping debt levels low. As the Capital Structure box shows, long-term debt makes up just 5% of the company’s capital structure. This is an extremely low sum for a company engaged in a capital-intensive industry. Although some might argue that leveraging the company would increase returns for shareholders, which it indeed would, such leverage would also pose a significant risk because of the volatile nature of the commodities underlying revenues. A conservative stance seems more in line with keeping shareholders from such risks as insolvency and dividend cuts.
While on the topic of dividends, Exxon Mobil pays one, providing investors with tangible returns. A long history of dividend increases, which can be seen in the Statistical Array, is clear evidence of a desire to reward investors. In fact, as the Annual Rates box shows, the historical dividend growth rate has hovered between two and three times the long-term average inflation rate of about 3%.
Although the dividend has been a clear benefit for shareholders, it could be argued that a company with the cash flow and financial strength of Exxon Mobil could probably afford to a little more generous with its shareholders. Note that even when earnings fell precipitously in 2009, dividends as a percentage of earnings (the payout ratio) was just 43%—not an onerous amount by any stretch of the imagination (this number is found in the Statistical Array).
This may be true, but again, conservative management helps protect shareholders from such risks as a dividend cut, a clearly unwelcome event for most. In flush times, however, this conservative stance leaves the company with a lot of extra cash lying around. Note that at the end of September 2011, Exxon had over $11 billion in cash on the balance sheet (this information is available in the Current Position box). In 2010, it used some of that cash to purchase XTO Energy, a long-term, shareholder friendly move.
It also issued shares in that transaction. This was an odd event for Exxon, however, as the company has a penchant for buying its own shares rather than issuing them. In fact, a look at the Statistical Array shows that, 2010 aside, the shares have been on a long-term trend lower since 1999. In fact, even after issuing shares in 2010, the company appears on track to buying back all of the issued shares by the end of 2011.
Some companies use stock buybacks to offset the dilution from executive stock grants, which can make the value of a buyback dubious at best. Other companies say they are going to buy back stock to great fanfare, only to quietly do nothing with their shares. Exxon is definitely doing a great deal on the buyback front, repurchasing about a million shares in the last decade or so. As such, this is another tangible way for management to return value to shareholders, as a reduced share count leads to higher per share earnings.
As a discretionary event, however, this is a way to return value that does not come with an ongoing commitment. Thus, true to the company’s conservative nature, buying shares will wax and wane with the oil giant’s fortunes—which makes sense given the commodity exposure inherent to the business.
For a conservative investor seeking exposure to the oil and natural gas industry, Exxon Mobil is a solid option. It may not be exciting, but management knows its business and works within a logical set of parameters to ensure shareholders get rewarded.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.