What Can We Learn from Exxon Mobil Corporation (XOM) in the 1980s and 1990s

Earnings per share increased due to the superior capital allocation of management – going from 72 cents/share in 1983 all the way up to $1.31 in 1998. All the historical per share numbers for Exxon have been adjusted for stock splits. The decline in 1989 earnings per share was due to the Valdez oil spill. Earnings per share rebounded quickly after that.

The high earnings per share growth was achieved mostly with the help of share buybacks reducing the number of shares outstanding. The company pursued a less aggressive program of regular share repurchases after the Valdez oil spill of 1989.

Dividends per share more than doubled during this period, from 39 cents/share in 1983 all the way up to 82 cents/share. Exxon’s management had chosen to raise dividends for 15 years in a row, and reward their patient long-term shareholders. This is what shareholder- centric management teams do.

The dividend payout ratio was consistently above 50% during our study period. I remained above 50% between 1989 and 1996. I was surprised to learn that the best time to acquire the stock was during the time when the dividend payout ratios were so high.

The share price increased during the period, due to low valuation in the early 1980s, high yields, and the fact that interest rates were decreasing. The share price increased from $3.77/share in 1983 to $40.28/share by the end of 1999. When interest rates are decreasing, this boosts the value of corporations, since their cost of capital is cheaper and because equity prices look more favorable to investors when interest rates go down.  The stock was cheap in 1983 at 5.20 times earnings and a dividend yield of 10.20%. By late 1999, the stock was yielding 33.80 times earnings and yielded 2.10%.