Recently two of my colleagues each wrote an article looking at two different metrics and found the same company was the best in both. Dan Caplinger wrote about the top four Dow stocks when it comes to returning value to shareholders, while Brian Stoffel wrote about the five cheapest Dow components. The No. 1 company for both lists was Exxon Mobil Corporation (NYSE:XOM), but i believe there are two important lessons we can take from these lists, and I don’t think these No. 1 rankings make Exxon a screaming buy.
Exxon’s price-to-earnings ratio, which is what Brian used to determine the cheapest company, was 9.3, while the next lowest P/E ratio for any other Dow Jones Industrial Average component was 9.5, for Chevron Corporation (NYSE:CVX) and JPMorgan Chase & Co. (NYSE:JPM). There are probably a number of reasons the stock is trading at such a deep discount right now, such as a higher future P/E of 11.11, possible problems relating to recent oil spills, and, most importantly, the price of oil. While the short-term oil-spill problems shouldn’t change a long-term investor’s thesis, it will weigh on the minds of short-sighted traders. When it comes to the price of oil and its volatility, anyone investing in any oil company needs to fully understand that profits and stock prices are likely to fluctuate with the changes to the price of the commodity.
But the mostly likely reason shares are trading at such a discount today is that investors and analysts believe future earnings will be lower than they are today, hence the future P/E of 11. To figure out what the P/E ratio is, we take the current share price and divide that by per-share earnings for the past 12 months. So for Exxon Mobil Corporation (NYSE:XOM) we take $91.53 / $9.83 and get 9.31. To get the future P/E, we take the current share price and divide it by the expected future earnings per share, which analysts believe will be $8.05 during 2013.
This drop in earnings per share is not just something Exxon Mobil Corporation (NYSE:XOM) will experience this year: Most of the major oil companies are expected to make less in 2013. Chevron Corporation (NYSE:CVX)’s current EPS is $13.23, but it’s expected to fall to $12.39. BP plc (ADR) (NYSE:BP) currently has an EPS of $7.10, but that has been estimated to decline to $5.00 during 2013. Just because the current P/E is low, that doesn’t mean a stock is a great buy. P/E ratios are backward-looking, and as investors we shouldn’t care much about what has happened in the past. The future will determine the movement of the share price.
Meanwhile, Dan calculated that Exxon Mobil Corporation (NYSE:XOM) returned more capital to shareholders than any other Dow component, and by a substantial margin. Exxon directly or indirectly gave shareholders $31.4 billion over the past 12 months. The next closest was AT&T Inc. (NYSE:T), which gave back $26.7 billion, and then Johnson & Johnson (NYSE:JNJ), which returned $196 billion. While Exxon did take the top spot, only $10.4 billion came from dividends; the rest came in the form of share buybacks. AT&T gave investors $16.6 billion in dividends and spent only $11 billion on share buybacks.