The Dividend Production Of A Single Exxon Share

Since 1977, Exxon has raised its dividend by 7.47% annually. This is a figure that can be a little bit misleading if you intuitively conclude that it tracks the earnings growth of the firm, as the Board of Directors decided in 1984 that a strategy dedicated equally to buybacks and dividends was in the best interest of shareholders. It’s served shareholders exceptionally well, as 6% annual growth from production expansion and commodity price increases has translated into over 9% earnings per share growth. Throw in the dividend, and Exxon shareholders have collected 13.12% annualized returns since 1977 (the results would be even better if dividend reinvestment were included, though they would be lower if held in a taxable account).

What I like about Exxon’s dividend is that it is the only firm where you can have over 95% certainty that the dividend won’t be cut, even in an extended period of low oil prices. Jeremy Siegel’s research focuses on the “return accelerator” effect of reinvested dividends during bear markets, and an investment in ExxonMobil gives you the certainty that the dividend payout will actually grow–or at least remain constant–during an extended period in which oil stays in the $30s.

I have spoken before about how shareholders of companies like Emerson Electric and Procter & Gamble will look back upon the 2008-2009 period with a bit fondness, as the dividend increases interacted with low share prices to create greater share accumulation during the period of the market decline. What is nice about Exxon is that it has an extraordinarily high assurance of dividend growth, giving long-term investors that edge which Dr. Jeremy Siegel has frequently covered in his writings.

Dating back to its Standard Oil days, a trust formed by John David Rockefeller himself in 1882, there has never been a dividend cut at ExxonMobil. The last dividend freeze came in 1982, although the surrounding historical context might mitigate how you feel about that: Oil fell hard in 1982, and Exxon had previously increased its dividend substantially by 10% in 1978, 18% in 1979, 38% in 1980, and 11% in 1981. It was that 38% dividend hike in 1980 that overextended Exxon a bit in 1982 after the price of oil fell hard.

Exxon is currently in the enviable position (for a cyclical company) of having its current dividend payout covered by profits. Exxon is committed to paying out $2.92 per share in dividends, and is expected to earn between $4.15 and $4.30 in the next twelve months. It’s a payout ratio of around 70%, which is a strong position considering the low point of the economic cycle.

This is the point where Exxon shines, as it had been hesitant in granting dividend increases when the price of oil recovered. Coming out of the previous recession, Exxon saw its profits grow from $3.98 in 2009 to $6.22 in 2010 and then $8.42 in 2011. But these earnings gained, fueled by rising oil prices, did not translate into generous dividend hikes. Shareholders only got a 4% raise in 2010, and a 6% raise in 2011. The lower dividend growth in those years positioned Exxon well for dividend growth in the current environment. Those 38% dividend hikes like the 1980 shareholders received has become a thing of the past, as Exxon has elected to follow a more moderate strategy of less-than-warranted dividend growth during the good times in return for better-than-warranted dividend growth during difficult operating conditions.

If I had to draw up an energy portfolio from scratch, the ideal long-term allocation would probably be something like this: 25% Exxon, 15% Chevron, 15% Royal Dutch Shell, 10% BP, 10% Phillips 66, 10% Conoco, 5% BHP Billiton, and 10% niche investment opportunities like Buckeye Partners which is a Midwest/Eastern oil distributor that utilizes the MLP structure.

The reason why Exxon would be treated as a foundational block is because of its vast integrated business model that lets the dividend keep inching forward year after year. It is frequently neglected because it offers a lower yield than its peers, but it offers the distinct advantage of a high dividend growth rate that eventually makes up for this starting dividend yield.

Back in January of 2003, Exxon stock traded at $32 per share. It paid out $0.98 in dividends. The dividend yield was 3.06%. This was a much lower yield than you could get from comparable firms like Chevron, the then-existing ConocoPhillips, BP, and Royal Dutch Shell. But here is where things have gotten interesting: Exxon has grown that dividend from $0.98 in 2003 to $2.88 in 2015 (My note: The reason why it may be confusing when I note that Exxon paid out $2.88 in 2015 while mentioning that Exxon is on the hook for $2.92 annually is because Exxon typically raises its dividend between the first and second quarter. In other words, Exxon shareholders collected $0.69 in the first quarter of 2015. When I mention the $2.92 obligation, I am taking the current $0.73 quarterly payment and annualizing it).

This means that, dispute the low initial 3% yield, Exxon shareholders have collected the following: $0.98 (2003), $1.06 (2004), $1.14 (2005), $1.28 (2006), $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011), $2.18 (2012), $2.46 (2013), $2.70 (2014), $2.88 (2015). An Exxon shareholders has collected $22.85 in total dividends since 2003, and this assumes absolutely no dividend reinvestment (if there had been, the amount collected would be quite a bit higher). Compared to the $32 share price, an Exxon shareholder collected 71.4% of his total investment amount back in the form of dividends between 2003 and 2012.

This is why people that find great companies, buy them at fair prices, and then hold indefinitely don’t freak out when there is a hiccup in the share price. It gets attention to talk about how Exxon traded at $104 back in 2014 and now trades at $78 per share. But if you’ve been around for a bit, and include the dividends, the story is much different. Somewhere that bought Exxon at $32 in 2003 is now looking at a $78 share price plus $22.85 in total dividends–the purchase of $32 is now worth $100.85.

Over the past twelve years, an Exxon shareholders has tripled his money. And this understates the case because you wouldn’t just let the cash proceeds pile up for twelve years–you’d find some productive use for the funds. The $2.92 in annualized dividends now represents a 9.12% yield-on-cost compared to the $32 purchase price in 2003. That 3% yield only showed the tip of what was to come: the payments generated by the initial payment kept growing, growing, and growing. Even here in 2015, with oil in the $30s, Exxon is expected to make over $17 billion in annual profit. It is an extraordinary cash cow, especially when you step back and look at what each share of Exxon has produced over the past twelve years. Every $10,000 invested has cumulatively produced $7,140 in total income. My guess is that from 2003-2020, each share of Exxon will produce as much cumulative dividend income as the initial price of the stock itself. This dividend growth during poor industry conditions is what distinguishes Exxon from its peers, and makes it one of only three firms in the sector that I’d consider a lifelong hold. It’s one of the few dozen firms in the world that is a true cash-producing machine for the long haul.

Originally posted 2015-12-30 17:05:58.

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