XOM Stock: Is It Time to Dump Exxon Mobil Corporation?

Dump Exxon Mobil StockTime to Bail on XOM Stock?

Sometimes, bad things happen to good companies. Case in point: Exxon Mobil Corporation (NYSE:XOM) stock.

When I first wrote about Exxon in 2014, XOM stock was trading at more than $100.00 per share. As if on cue, the stock collapsed. Last week, shares were trading for as low as $80.00 each.

What happened? Well, a couple of things happened.

First, oil prices crashed. If you earn fewer dollars on each barrel, profits are going to suffer. You don’t need an MBA to figure that out.

Second, last quarter, Exxon failed to replace all the oil and gas it pumped in 2015. This was the first time the company could not replace its reserves in more than 20 years. Analysts are worried Exxon will not be able to grow or even sustain output over the long haul. (Source: “Exxon Mobil Corporation Failure to Replace Reserves Speaks Volumes,” Bidness ETC, February 22, 2016.)

Time to bail? Hardly.

If you believe in buying great businesses on sale, Exxon stock may be worth a look. Here’s why…

Exxon Is One Dividend Stock to Own Forever

First, crazy energy prices are just a reality in the oil patch. This is a cyclical business. If you can’t stomach the swings, maybe you should stick to bonds.

Many of Exxon’s assets will be in operation for the next 50 years. Over that period, there will be many ups and downs. When you think over these kinds of timetables, the current downturn seems trivial.

Exxon, though, is built for this.

Besides drilling for oil, Exxon is also involved in shipping and refining energy products. This helps smooth out the volatility.

As a result, the company seems to grow stronger through each cycle. Management tends to build up cash during the boom years. Then, in a recession, Exxon is able to scoop up assets on the cheap.

The real key to Exxon’s success, however, is management. Most analysts prefer to study rig counts and throughput rates. Technical stuff that is easy to put a number on. The management “X-factor,” though, is a key reason why the stock has trounced peers year after year.

What Exxon has that rivals lack is discipline. The company only bets money on the best projects. If management can’t find enough profitable ventures, they return extra cash to owners.

Sure, Exxon could grow faster. But this would require huge, costly investments. Shareholders may be able to find better returns elsewhere.

We have a metric to judge how well a firm is managing our money: return on capital employed (ROCE). The ratio measures how much cash is going into the business versus how much is coming out. This is key in industries that consume a great deal of capital, like energy.

Since 2010, Exxon’s ROCE has averaged 20% per year. This is heads and tails above its Big Oil rivals. As a result, XOM stock has crushed peers decade after decade. (Source: “Exxon Mobil 2015 Shareholder Presentation Slide 10,” Exxon Mobil Investor Relations, May 27, 2015.)

Now some might scoff at Exxon’s 3.6% dividend yield. But by focusing on the current payout alone, you might be missing the big picture.

To me there are two ways of looking at dividend stocks: some pay a high yield, but are slow to hike their payouts, while others sport lower yields, but increase their dividends at a faster clip.

Here’s the deal: If you want current income, look elsewhere. But if you like rising dividends and are a little patient, Exxon stock is a top candidate.

Growth Chart

Source: Exxon Mobil Investor Presentation

The stock is a dividend machine.

For 34 straight years, Exxon has increased its payout. If you had bought shares in 1982 and reinvested all of your dividends, the yield on your investment would be 74% today.

Exxon also has an appetite for its own stock. Since 1998, management has reduced the total number of shares outstanding by 40%. This has allowed investors to almost double their stake in a wonderful business tax-free. (Source: “Exxon Mobil 2015 Shareholder Presentation Slide 14,” Exxon Mobil Investor Relations, May 27, 2015.)

The Bottom Line on XOM Stock

Exxon is no slam-dunk. Business cycles will continue to wring out weak shareholders. If oil prices drop, XOM stock will fall in lockstep.

However, the company’s rock-solid business and growing dividends should limit the damage. Buckle up. Long-term investors should be rewarded if they’re willing to ride out the ups and downs.