On Wednesday, Warren Buffett appeared on CNBC’s Squawk Box, and on that day, the prices of most American stocks were down a token amount in the 2-3% range (but enough to propel commentators into action). As you’d imagine, Warren Buffett got asked the obligatory question: “What, if anything, are you buying or selling?”

Buffett framed his response by noting that the appeal of buying companies grows for him as prices decline, and he did treat the modest selloff as an opportunity to buy. When pressed further, he provided a hint that he was buying a company that is a household name, and would not specify whether he was adding to an existing holding or initiating a new position.

If I had to speculate?

I would guess that Buffett is buying up more shares of Exxon stock.

The basis for that speculation would be two-fold: First, Buffett has said in the past when he is initiating positions in new companies, as the universe is wide. Heck, he even played a game daring the anchors to guess what his previous investment was, offering only the hint “Hal.” They couldn’t figure it out, until he came back and noted what happens when you move down one letter on each: “H-A-L” becomes “I-B-M.”

But the universe of stocks that he already owns is much smaller, and therefore more guessable, so I would expect Buffett to be more reluctant to note that he is adding to something he already owns, unless he planned to fully disclose it at the time.

That leads me to think that he is probably adding more Exxon to the portfolio. In his letter to shareholders earlier this year, Buffett noted that Berkshire purchased 0.9% of the oil giant, ExxonMobil. The total investment amount was $3.737 billion, and the total shares purchased amounted to 41,129,643 shares. Breaking it down an additional step, Buffett thought it made sense to purchase long-term shares of ExxonMobil last year at a price of $90.85.

Right now, after this most recent slide oil stocks especially, Exxon has come down to the $92, $93, $94 range. Even rounding up, comparing $90.85 to $94 is only a 3.46% increase. Heck, Exxon’s repurchased that much stock alone in the past year, leading me to believe that Buffett sees an intrinsic value increase for the year of at least 3.46%, and is using this opportunity to add some more stock.

I’ve been looking through the book Private Empire again, which tells the story of how Exxon wields more political power than the government in some third-world countries, and because of its size and scope, necessarily became a pioneer in some of the fields of financial engineering and setting incentives.

As an example, Exxon was the first company among the “if you’re a long-term dividend investor, you own this” crowd to start repurchasing stock annually as a corporate policy, after seeing Henry Singleton’s success at Teledyne and after the SEC loosened the rules in 1982 so that stock repurchasing no longer was legally ambiguous with market manipulation.

In Exxon’s case, it was a masterstroke of genius. The company was approaching a size where it could no longer grow profits at a 10% clip, but it could grow profits at a 5-8% clip and retire 3-5% of its stock, depending on the year and the capital investment opportunities available at the time. By deciding to permanently retire 3-5% of its outstanding stock each year, it created a situation where the company could have lower organic growth yet still deliver returns to investors that aligned with historical expectations.

It’s not that the stock buyback itself is magical per se, but rather, it interacts well with two other things: (1) Exxon’s core business operations generate enormous cash profits, with only 25-33% devoted to the dividend in a given year, and (2) Exxon Mobil rarely gets overvalued, and is in fact frequently undervalued, so that the company is creating value when they retire company stock that is selling less than what the company is worth.

The other thing that Exxon does especially well is restrict the ability of company executives and directors to sell the stock after they work for the company—Exxon makes you hold it for a while (though I’m currently unsure of the specifics). The point of it was to encourage management teams to seek out long-life oil fields that would be in operations for decades, and if you knew you were stuck with the stock until 2024 rather than 2014, you would be more inclined to seek permanent value rather than short-term profit bumps.

Exxon Mobil is a culture. It’s a system. It’s a collection of assets so vast that it has 25.2 billion barrels of oil and oil equivalents which are currently being replaced at a rate of 120% (so that amount of harvestable assets under Exxon’s control continues to grow). Those distribution networks span 48 countries. That’s why I’ve written extensively about dripping the stock: you get a 3-5% buyback, some organic growth, oh, and some kind of dividend payment has been every year since 1882. It’s one of those ten pillars that you stick right there next to Coca-Cola, Nestle, Procter & Gamble, Colgate-Palmolive, Berkshire Hathaway, General Electric, Johnson & Johnson, Chevron, and Unilever.

Considering that Buffett was okay buying Exxon last year at $90, it wouldn’t surprise me in the least if he felt comfortable buying it today around $93. The main reason why he wouldn’t do so is because (1) he found a greater opportunity that showed up elsewhere, and/or (2) he expects greater opportunities ahead and is being patient. But given that he said in the interview that he is thinking in terms of fifty-year horizons, I can’t help but guess that he is thinking about Exxon: it has the history, culture, assets, and likely trajectory to fit the bill.

Originally posted 2014-10-04 16:49:48.

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