Exxon Mobil Corporation (XOM) Dividend Stock Analysis

Summary

-Exxon Mobil (NYSE: XOM) is one of the largest public companies in the world.
-Falling oil prices due to the worldwide recession have hurt the company’s profits, but they’ve rebounded in 2010.
-Five-year revenue growth: 1%
-Five-year earnings and cash flow growth have been negative.
-Dividend Yield: 2.45%
-Five-year Dividend Growth: 9%
-With a P/E of a little under 13, and a forward P/E of a little over 11, I find XOM stock to be an appealing investment for the long-term at the current price.

Overview

Exxon Mobil (NYSE: XOM) is a well-known, extremely large, energy company. The company has upstream, downstream, and chemical components, oil, natural gas, and other businesses, and operations in countries all over the world. So Exxon Mobil is diversified by energy type, location, and industry.

The company has 11.6 billion barrels of liquids and 68 billion cubic feet of gas proved in developed and undeveloped reserves.

2009 Earnings Breakdown

Exxon Mobil had earnings of over $19 billion in 2009. Their segments are upstream, downstream, chemical and other/corporate.

Upstream
Upstream includes exploration, development, and production of energy sources.

In 2009, Upstream accounted for $17.1 billion in earnings. In previous years, this peaked as high as $35 billion and typically has been over $25 billion. At $11.92 in 2009, Exxon Mobil earns more per oil-equivalent barrel than their competitors. During highs and lows, Exxon Mobil has consistently outperformed competitors in this metric due to its size and efficiency.

Upstream also accounts for the highest capital expenditures, with over $20 billion spent in 2009. Key exploration captures in 2009 included acreage in Pennsylvania, Canada, Poland, Vietnam, Germany, Norwegian Sea, Black Sea, and Indonesia. The company has over 130 major projects located around the world, including in difficult deepwater and arctic locations, oil sands, unconventional gas, LNG, and acid/sour gas.

Return on average capital employed for the upstream segment for 2009 was 23%, compared to the 42% five-year segment average of the company.

The first nine months of 2010 have shown a 47% increase in upstream earnings compared to the same period in 2009.

Downstream
Downstream includes refining, marketing, power, lubricants, and specialties.

Earnings for 2009 for the downstream segment were $1.8 billion. Earnings in recent years were over $8 billion, reflecting that the 2009 downstream environment was weak with low margins. Capital expenditures for this segment were $3.2 billion in 2009.

The company sells fuel through a network of 28,000 service stations (retail gas stations) worldwide. Exxon Mobil is converting company-owned stations to a branded distributor business model. In addition to this retail market, the company also supplies fuel for the industrial, marine, and aviation industries.

XOM is the largest supplier of lube basestocks and has 15% of the synthetic lubricants market share (a figure that has been growing over the past several years).

Return on average capital employed for the downstream segment for 2009 was 7%, compared to the 29% five-year segment average of the company.

The first nine months of 2010 have shown a 23% increase in downstream earnings compared to the same period in 2009.

Chemical
Earnings for the chemical segment for 2009 were $2.3 billion, and capital expenditures were $3.2 billion.

Return on average capital employed for the chemical segment for 2009 was 14%, compared to the 18% ten-year segment average of the company.

The first nine months of 2010 have shown a 141% increase in chemical earnings compared to the same period in 2009.

Corporate
The Corporate segment accounted for a loss of $1.9 billion in 2009.

Revenue, Earnings, Cash Flow, and Metrics

Exxon Mobil has experienced growth followed by a significant drop in oil prices over this five-year period.

Revenue Growth

Year Revenue
2009 $310.6 billion
2008 $477.3 billion
2007 $404.5 billion
2006 $377.6 billion
2005 $370.7 billion
2004 $298.0 billion

Revenue growth has averaged less than 1% over this five-year period due to the recession and significantly reduced energy prices. Revenue over the trailing 12-month period, however, has been over $360 billion, representing a considerable improvement.

Earnings Growth

Year Earnings
2009 $19.280 billion
2008 $45.220 billion
2007 $40.610 billion
2006 $39.500 billion
2005 $36.130 billion
2004 $25.330 billion

Exxon Mobil’s earnings growth has been negative over this five-year period. The trailing 12-month earnings, however, shows considerable improvement at over $27 billion.

Operating Cash Flow Growth

Year Cash Flow
2009 $28.483 billion
2008 $59.725 billion
2007 $52.002 billion
2006 $49.286 billion
2005 $48.138 billion
2004 $40.551 billion

Operating cash flow has followed the same pattern of earnings with growth followed by a fall and a rebound. The operating cash flow for the trailing 12-month period has rebounded to nearly $44 billion.

Metrics

The current P/E is a little under 13 and the forward P/E is a little over 11. The P/B is approximately 2.5.

The Return on Equity is 17%. This is a very strong ROE when their low level of leverage is taken into account.

Dividends

Exxon Mobil is a dividend aristocrat and has been increasing its dividend every year since 1982. The company is currently yielding 2.45% with a payout ratio of approximately 30%.

Dividend Growth

Year Dividend Yield
2010 $1.74 2.50%
2009 $1.66 2.40%
2008 $1.55 1.90%
2007 $1.37 1.50%
2006 $1.28 1.80%
2005 $1.14 1.90%

Over these last five years, XOM has grown its dividend by nearly 9% annually.

Dividend Repurchases

In 2009, they had a net repurchase of approximately $19 billion worth of stock. In the three years before that, they averaged over $30 billion per year worth of share repurchases.

Balance Sheet

Exxon Mobil has a superb balance sheet, with a total Debt/Equity ratio of 0.12 and a three-digit interest coverage ratio.

Investment Thesis

16,500 of Exxon Mobil’s employees are engineers and scientists. Looking at it this way, Exxon Mobil, like other major energy companies, is a gold mine of technical talent rather than just an energy company. The company has evolved and changed with the times since the 1800s and I think it’s likely to evolve and change throughout the future to meet new demands and deal with new technologies. Energy, from a variety of sources, serves as one of the backbones of modern civilization.

According to the 2009 annual report, Exxon Mobil predicts that by 2030, world energy needs will be 35% higher than in 2005. Most of this increase is predicted to come from countries like China and India. Energy usage in developed countries is expected to remain flat, despite increased economic output, due to continually increasing energy efficiency. During the period of 2005-2030, the company predicts that oil demand will grow by an annualized 0.8%, coal will grow by 0.5%, gas will grow by 1.8%, biomass and other will grow by 0.5%, nuclear will grow by 2.3%, hydro and geothermal will grow by 2.2%, and that solar, wind, and biofuels as a group will grow by 9.6%.

The company expects light vehicles to take up a smaller and smaller portion of the world’s energy demands as companies continue to produce more efficient vehicles. And presumably, electric vehicles will become more mainstream. In contrast, energy use of heavier vehicles is expected to grow substantially.

The fastest energy demand increase is expected to come from power generation. Power generation fuels an increasing level of comfortable living around the world, and developing countries will require more and more power. In addition, electric cars derive their energy from the power grid. This is something to keep in mind if they become mainstream. Exxon Mobil expects natural gas to play a larger and larger part in power generation, and also expects that by 2030, 40% of the world’s electricity will be generated by nuclear and renewable sources.

I make no short-term predictions for stocks or commodity prices, but for the long-term, I find the energy sector appealing. As the global economy improves, energy demand is likely to continue to increase, especially in developing countries. Coupled with the finite accessible world reserves of key fuels, I’m bullish for the foreseeable future. Well-managed companies that are able to adapt themselves to changing energy sources will likely exist and thrive for quite a while.

Risks

Exxon Mobil’s profits are largely determined by oil prices and natural gas prices, so that’s the key risk that investors take on with XOM stock. In addition there is regulatory risk, currency risk, and the ever-present risk of a major catastrophe or litigation (think BP). A long-term risk is the increasing viability of alternative energy sources, and only time will tell if Exxon Mobil can continue to reshape itself as it has in the past when dealing with a world of changing energy.

Conclusion and Valuation

Exxon Mobil has consistently maintained a higher return on capital for their upstream, downstream, and chemical segments than their competitors for the last several years through the highs and the lows of the industry. According to the most recent quarterly report, the nine-months of 2010 have been a vast improvement over 2009 for all three segments. The dividend growth/yield combo is solid, and the low payout ratio gives the dividend safety and room for continued growth. The company, due to its size and scale, has a large economic moat as evidenced by the company consistently outperforming its competitors on several metrics. The balance sheet is very strong, and the products should be in demand for quite a while. In conclusion, I find XOM stock to be attractively valued at the current price.

Full Disclosure: At the time of this writing, I own shares of XOM.
You can see my full list of individual holdings here.

Further reading:
Lowe’s Companies (LOW) Dividend Stock Analysis
The Clorox Company (CLX) Dividend Stock Analysis
Intel Corporation (INTC) Dividend Stock Analysis
Costco Wholesale (COST) Dividend Stock Analysis
Texas Instruments (TXN) Dividend Stock Analysis

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Comments

  1. Great analysis. It’s hard to argue with a company that has been profitable for over 100 years (Standard Oil anyone?). The world will always need energy, no matter the form it comes in. As long as XOM can adapt, and I think they can, it’s a great stock.

    Disclosure: Long on XOM. My holdings http://dividendpig.blogspot.com/p/current-portfolio-holdings.html

  2. Thanks for a fine analysis which I have been looking forward to. That bit about future energy demand is especially interesting. As you mentioned Exxon has done enormous sharerepurchases, the biggest ive seen. Personally Id like a more balanced approach between dividends and repurchases.

    I have also noticed exxons superior return on ROA. They have superior margins aswel. However this comes with a valuationpremium compared to competitors. This may very well be motivated.

  3. “The fastest energy demand increase is expected to come from power generation. Power generation fuels an increasing level of comfortable living around the world, and developing countries will require more and more power.”

    Could this be a good case for purchasing shares of EXC? :)

  4. Excellent work Matt!

    Where do you find the time? :)

    XOM has more than a economic moat, they have a small river around them. I definitely want to own XOM long-term, simply don’t have any cash to invest right now – other than borrowing which I don’t do.

    I agree with defensiven – big oil cos. should strike a better balance between dividend increases and buybacks. That said, either one is good for investors.

    Cheers,
    Mark

  5. Hi Monk! i was reading defensivens analysis of Hudson and in the comments u replied that you were going to get an analysis up yourself, hows it coming along?

  6. Chef,

    Hudson is going to be one of the first 2011 reports. I suspect it will be the third report I publish in 2011, so mid-late January would be the time to look for it.

  7. Pey,

    XOM’s report suggests that energy production among developed nations will remain flat due to a combination of increased economic output and increased energy efficiency to balance it out. So since Exelon operates in developed areas, I don’t expect massive increases in electricity output for them. I do intend to keep an eye on the trends of electric cars, though.

  8. Hi Monk! i was reading defensivens analysis of Hudson and in the comments u replied that you were going to get an analysis up yourself, hows it coming along?

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