Dividend Aristocrats Part 31: Exxon Mobil Corporation (XOM)

Expected Total Returns

ExxonMobil stock currently has a dividend yield of 3.6%.

ExxonMobil’s earnings are tied to oil prices.  As a result, they are very volatile.  Using average earnings-per-share over a 10 year period helps to ‘smooth’ the company’s earnings and give a better picture of earnings growth.

Average 10 year earnings have grown from $4.17 a share in 2008 to $6.83 a share in 2015.  This comes to a compound annual growth rate of 7.3% a year.  From 1999 through 2015, dividends-per-share have grown at a compound rate of 8.0% a year.

A sizeable portion of ExxonMobil’s growth over the last 15 years is a result of share repurchases.  The company has repurchased around 3.0% of its shares outstanding every year on average for the last 15 years.  I expect share repurchases of around 3.0% a year to continue over the long-run for ExxonMobil shareholders.

For long-term investors, I expect total returns of 8.5% to 10.5% a year from the following sources:

 – Dividends of ~3.5%

 – Share repurchases of 3.0% a year

 – Margin improvements of 1.0% a year

 – Organic growth of 1.0% to 3.0% a year

Keep in mind that these numbers are over long enough time periods to encapsulate both rising and falling oil prices.

Valuation

Exxon Mobil Corporation (NYSE:XOM) stock is about 20% off 2014 price highs.  The company is currently trading for a price-to-earnings ratio of 17.3.

Due to the volatility of oil prices and the impact this has on ExxonMobil’s earnings, dividend yield is a better metric to use to assess ExxonMobil’s valuation.  Specifically, ExxonMobil’s historical dividend compared to its current dividend.

The image below shows ExxonMobil’s dividend history over the last ~40 years.

ExxonMobil is currently trading near dividend yield highs not seen since the mid 1990’s.  Don’t hold your breath waiting for the company to hit 10%+ dividend yields again (like in the early 1980’s)…  The company is very likely undervalued at current prices today based on its dividend yield over the last 20 years.

Final Thoughts

ExxonMobil has been a Top 10 stock using The 8 Rules of Dividend Investing in the past.  The stock still holds an above average rank today.

ExxonMobil’s diversified businesses give the company enough cash flows to pay increasing dividends even through periods of low oil prices.  When oil prices rise, ExxonMobil becomes even more profitable.  The company has an excellent track record of returning its profits to shareholders through dividends and share repurchases.

ExxonMobil is the Gold (black gold?) standard in safe dividend growth oil and gas companies.

Disclosure: None