Exxon Prioritizes Longevity, Go Long

By Muhammad Bazil - October 30, 2012 | Tickers: CVX, COP, XOM, MRO, MUR | 0 Comments

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Exxon (NYSE: XOM) is an energy bigwig that has managed to maintain a healthy lead against its competitors for varied reasons, like healthier cash reserves and a wider global footprint. Nonetheless, the core reason why it has remained a domineering force for more than one hundred years is the fact that its management prioritizes longevity.

Basing my argument on the idea that Exxon pushes for longevity, it would be safe to assume that its stock appeals more to growth investors, as opposed to income investors. In simple terms, if you want a secure portfolio that can fully substitute your pension fund in, say, twenty years, Exxon is a good choice. There are many reported cases where Exxon shareholders have passed over their healthy portfolios to their children.

Why argue that Exxon is perfectly tweaked for the long haul? Its dividend yield and capital appreciation tells it all. Its yield, which seemingly appears less attractive when compared to close competitors and the industry average, allows it to maintain sustainability in the uncertain oil industry. Similarly, it is known to repurchase its stock in substantial amounts, having repurchased more than $50 billion over the past three years. This combination of sustainable yields and capital appreciation enhances growth prospects.

Narrowing in on its yield, Exxon has a good history of dishing out dividends. Back in fiscal 2011, the energy behemoth had a payout ratio of 17% to operating cash flow and 23% to net income, leading to a final ratio of around 38%. The table below offers a more definitive insight, revealing the notable consistency and the improved dividend payout (Year-over-Year basis) in the last payout.

Source: Yahoo! Finance

Although its consistency is more profound than the actual yield, the increase in yield spells hope for the future. Briefly revisiting the topic of stock repurchases, you will establish that its lag in payout ratio is compensated by the fact that investors actually see their money being reinvested in the business.

With this tactful approach, shareholders manage to get reasonable income from the stock, while at the same time remaining exposed to the opportunity of investing their money in a low risk investment vehicle that offers much promise in the long haul.

Implications of overlooking growth prospects in the oil industry

I must add that Exxon’s approach is arguably the best in the oil industry. This is quite evident in its eclipsing market cap of $426 billion. This is better when compared to close competitor Chevron (NYSE: CVX), which flaunts a lesser, though commendable, market cap of $223 billion. Unlike Chevron, Exxon is more fixed on the long term future and avoids risky investments.

Chevron, on the other hand, knows nothing of this. By blindly buying Texaco in 2001, Chevron absorbed Texaco’s controversial contamination issues with villagers in the oil potent Amazon. Because of the rushed decision that Chevron made, it now has to assume responsibility for Texaco’s troubles; something that could cost it up to $19 billion following recent rulings by an Ecuadorian Court. Exxon, on the other hand, doesn’t have such costly litigation woes pulling it back.

Placing focus on the long term future also snuffs out the possibility of making uninformed and rushed decisions. Unlike Murphy Oils (NYSE: MUR), ConocoPhillips, and Marathon Oils, which have all made the news for major spin offs, Exxon has tried as much as possible to avoid spin offs and center on growth. This suggests that it makes long term and permanent decisions. Murphy, on the other hand, which is the latest to push forward with a spin off, finds itself in its current state due to the fact that some of its core decisions lack foresight. Why did it invest in the retail sector if it knew that it could not sustain its operations?

In conclusion, I have strong convictions that Exxon is a name that will continue dominating the oil sector for many years to come. Its fundamentals are strong and the long haul is promising.

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