What If You Bought $300 Worth of Exxon Mobil Every Month For Twenty Years Straight?

Since Warren Buffett announced his purchase of Exxon Mobil stock on behalf of Berkshire Hathaway, the price of the stock has gone up substantially in a two-month period for a company worth over $400 billion. Buffett paid about $90 per share. Since mid-November, the price has flirted with the $100 mark, currently at $99.52 as of the time of this writing. With a 10% or so pop in such a short time, I have heard from investors who have been dollar cost averaging into shares of Exxon and are now considering halting them.

I can’t tell you what to do, but here’s how I would think about it: Exxon Mobil is a beast. It gushes profits. When oil prices collapse, it still makes $15-20 billion in a year. When they are high or normal, the company can bring in over $35 billion in profits in a year. It has operations in over 40 countries, and there are a dozen or so companies in existence that strut the earnings power of a company like Exxon.

In addition, Exxon Mobil is merciless when it comes to buying back its own stock. Right now, it is retiring $3 billion worth of stock every ninety days. Sometimes, that figure increases to $5-$7 billion per quarter, depending on the capital investments that Exxon needs to make. This share count reduction matters; every single year, you get your hands on 5% more profits just by the nature of the company shrinking in size, without even taking into account dividends or the natural growth of the firm.

The beauty of dollar-cost averaging with a company like Exxon is that the Computershare fees are $0, allowing you to invest without any frictional costs. Exxon does not get overvalued for long periods of time (2007 was really the only “bad time” to invest in Exxon in recent memory), and this minimizes the risk of dollar-cost-averaging.

Over the past twenty years, a modest allocation of $300 per month would have created very real wealth. If you set aside $3,600 for Exxon each year, you would have made over $72,000 in contributions. Yet today, you would have over $317,548 in total wealth. You’d be collecting over $8,000 in Big Oil dividends each year, roughly double your annual contributions to the company. Those results are especially impressive given that 25% or so of your total investment hasn’t even had 5 years to compound.

Value and price do matter. The starting price is what determines your returns. But with something like Exxon, I wouldn’t be nit-picky. The company is a beast. It retires 5% of its stock each year. It engages in $10-$20 billion capital projects that almost no other company in the world could pursue. It is one of the few companies with a record of thinking in terms of decades, rather than the next quarter. The profits keep going up substantially each decade. The dividends keep going up each year. This company’s greatness is so secret. Rockefeller’s Standard Oil was so big that it had to be broken up by the United States government. It was one of the biggest most profitable companies in the 1950s. The 1960s. The 1970s.The 1980s. The 1990s. The 2000s. And, now it dances with Apple to see which company is the biggest in America. It has a profit engine almost like no other in the world. Anyone who has ever stuck with Exxon for a prolonged period of time has been handsomely rewarded. A look at the company’s current earnings power seems to indicate that will be the case going forward. With companies like Exxon, you want to spend your life buying more, more, more. I wouldn’t argue about 5% or 10% valuation with a company like that, but that’s just me.

 

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2 thoughts on “What If You Bought $300 Worth of Exxon Mobil Every Month For Twenty Years Straight?

  1. Rakesh Singh says:

    Tim – great article. I enjoy your writings. Question about debt. Do you consider CLX MO and PM debt loads to be a concern? They have strong cash flows but one bad quarter and those dividends look like they could be in jeopardy. Thanks & regards.

    1. Tim McAleenan says:

      With big tobacco, the point is to load up the balance sheet with nastiness and return profits to shareholders because you never know when the gravy train of tobacco profits will come to an end. The "political risk" with tobacco is unlike almost anything else, and therefore makes it less predictable than, say, the profits of toothpaste at Colgate. As for Clorox, the problem is that the debt stifles future growth a bit. Therefore, my solution would be to demand a discount in Clorox shares (that I don't believe exist at current prices) before purchasing. The brands are so strong and have such predictable cash flows that bankruptcy isn't really the risk there, but rather, that the debt will slow down future profit growth.

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