Exxon Mobil Corporation (XOM) Stock: Two Keys to Higher Returns

Exxon Mobil Corporation (NYSE:XOM)‘s stock is one of the most widely held securities in the investing world. That might have something to do with the fact it’s one of the largest publicly traded companies in the world. However, there’s a reason investors keep pouring money into the stock: It’s been a steady performer for decades.

In fact, the company has vastly outperformed the S&P 500 (S&P Indices:.INX) over the past decade as you can see from the following chart:

XOM Chart

XOM data by YCharts

While past performance is nice to see, it tells us nothing of how Exxon Mobil Corporation (NYSE:XOM)’s stock will perform in the future. For investors interested in the stock there are two areas that you need to watch carefully. If ExxonMobil can continue to excel in these areas, then I don’t see any reason why its stock can’t continue to outperform.

Allocation of capital
Exxon Mobil Corporation (NYSE:XOM), thanks to high oil prices, generates billions of dollars of annual cash flow. While that’s a good problem to have, the company does need to spend those dollars wisely. While the company spends billions to invest in new oil and gas projects, it also sends a lot of cash back to its investors. The company pays a relatively small dividend, currently around 2.5%, however, where the company really excels is a buying back its own stock. Over the past decade ExxonMobil has bought back more over $200 billion in shares.

That’s important for investors because it means that you’d own a larger portion of the overall company by holding on to your shares. For example, Exxon Mobil Corporation (NYSE:XOM) has only grown its oil and gas production by about 1% annually over the past decade. However, buy repurchasing all that stock, ExxonMobil was actually able to grow its production per share by 48% over that same time frame. That’s a buyback with a real impact and one that few companies can match.

That’s not the only area where ExxonMobil excels. The company’s return on capital deployed has averaged just under 25% since 2008. That smashes the returns’ of Chevron Corporation (NYSE:CVX) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) which averaged 20% and 15%, respectively, over the same time frame. Exxon Mobil Corporation (NYSE:XOM) does this by choosing to invest in the projects that can deliver the greatest overall rates of returns. If the company can keep up this pace, its stock should continue to rise.

Growing production
If there is a rub against Exxon Mobil Corporation (NYSE:XOM), its the fact that its returns-focused business has delivered only meager production growth over the past decade. However, growth is expected to accelerate in the decade ahead. After a projected 1% decline in production this year, the company expects to grow production by a 2%-3% annual clip through 2017. More importantly, this growth will focus on higher margin oil and natural gas liquids projects.

I will point out that this production growth is a bit lower than some of its peers. ConocoPhillips (NYSE:COP) for example is expected to grow its production by 3%-5% annually over the same time frame. The difference here is that ExxonMobil is starting off a much larger base, and as the nation’s top natural gas producer, the company is focusing its growth on higher margin commodities while de-emphasizing natural gas production growth. This will go a long way to ensure the company can continue generating those exceptional returns on capital employed.

The Foolish bottom Line
Exxon Mobil Corporation (NYSE:XOM)’s formula of allocating its capital toward higher margin production should reward investors in the years ahead. If the company can execute on its growth plan, I see no reason why the stock won’t continue to outperform.

The article ExxonMobil Stock: 2 Keys to Higher Returns originally appeared on Fool.com and is written by Matt DiLallo.

Fool contributor Matt DiLallo owns shares of ConocoPhillips. The Motley Fool recommends Chevron.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!