Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Exxon Mobil Corporation (XOM) May Continue to Underperform

Lately, the market hasn’t been treating Exxon Mobil Corporation (NYSE:XOM) with a lot of respect. The oil and gas supermajor has noticeably underperformed the broader equity markets in the last 24 months. To give investors a perspective, this is how Exxon Mobil Corporation (NYSE:XOM)’s stock performed since July 2011:

XOM Chart

XOM data by YCharts.

Compare this with the stock’s performance for the previous eight years — from July 2003 till July 2011 — and it looks like this:

XOM Chart

XOM data by YCharts.

To summarize, Exxon Mobil Corporation (NYSE:XOM) underperformed the broader markets dramatically in the last two years.

I also calculated the stock’s effective annual yield over the various holding periods, along with a comparison to S&P 500. There are two sets of data: The price return is the effective annual yield calculated using the stock price appreciation only, while the total return is the corresponding effective annual yield with reinvested dividends. Here’s how the figures compare:

July 2011-July 2013

(2 years)

July 2003-July 2011

(8 years)

July 2003-July 2013

(10 years)

ExxonMobil Price Return 5.7% 11.5% 10.2%
Total Return 8.3% 14% 12.7%
S&P 500 Price Return 12.2% 3.9% 5.6%
Total Return 14.7% 6% 7.8%

Source: Morningstar; author’s calculations.

What’s the big reason behind these diminished returns? And more importantly, will this stock continue to underperform in the foreseeable future? With fewer than 10 days before Exxon Mobil Corporation (NYSE:XOM) reports its second-quarter results, Foolish investors should be concerned whether this stock is worth a place in their portfolios.

Exxon Mobil Corporation (NYSE:XOM)The crux of the problem
For a company whose market capitalization is north of $400 billion, the answer isn’t so straightforward. However, the unmistakable signs of declining profitability are hard to ignore. A cursory look at the company’s profit margins for the last five years does not reveal much. However, upon delving deeper, the cash flow statements reveal a trend that long-term investors need to be wary of: Over the last five years, net cash used for investing activities has doubled from about $15 billion a year to more than $30 billion a year.

Many might argue, especially those in management, that this isn’t necessarily a bad thing. Larger investments should translate into higher production volumes in an era of increasing global demand as well as competition. Additionally, investment horizons in the oil and gas industry are pretty long — in fact, a matter of decades.

While these arguments are fair, profitability ultimately boils down to margins per barrel of oil extracted and sold. And that’s where it seems like a problem. The following chart depicts Exxon Mobil Corporation (NYSE:XOM)’s 10-year growth in revenue and capital expenditure over the last 10 years.

XOM Revenue 10 Year Growth Chart

XOM Revenue 10 Year Growth data by YCharts.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.