I like to think that somewhere out there there’s an investor who purchased Exxon Mobil (XOM) stock for exactly $30.11 in March 2020. According to Yahoo Finance, that price represents the lowest intraday low in what must have been the worst year for oil stocks since heck knows when. Such was the carnage in Exxon Mobil’s share price that you would have had to extend the chart all the way back to the 1990s to find the last time it traded at those levels. Since then, the stock has added $79.55 per share in price appreciation and $10.56 per share in cumulative cash dividends for a total return of 300%. That’s not a typo incidentally – Exxon really has returned 35% in cash dividends alone in just three years. Dividend reinvestment adds another 30 or so points to the three-year total return number.
You may be thinking two things at this point. The first goes along the lines of “well, duh, you are supposed to buy oil stocks when oil prices are low”. The second is that the above does not represent a fair apples-to-apples comparison as it incorporates a timeframe in which oil prices went from below $0 per barrel to $75-$80 per barrel currently (having averaged $100 per barrel last year). Adjusting the starting point to 2014, when a barrel of Brent crude also averaged around $100, reveals that Exxon stockholders have only seen around $10 per share in price appreciation in that time, or 1% annualized over a nine-year stretch.
The second point is interesting because those returns immediately increase by 4.85 percentage points upon the reinvestment of over $29 per share in cumulative cash dividends. Granted, that still doesn’t make for a particularly prodigious period of wealth creation for Exxon stockholders, but there is a good lesson in there on the importance of maintaining the wherewithal to pay cash dividends during oil price downturns. This is the “return accelerator” termed by Dr Jeremy Siegel in The Future For Investors. More specifically, those Exxon shares acquired with reinvested dividends in the 2020 period are now yielding a 12.3% yield on cost. When the company pays out $4 a share in annual dividends in a couple of years that yield is going to increase toward 13.5%. It’s like an internal compounding machine that only requires flat dividend checks to maintain.
On point one, the “you obviously buy at the low point in the cycle” argument should come with the caveat that Exxon entered 2020 with over $40 billion in net debt and a $15 billion annual dividend bill. Although it doesn’t negate the point, you needed a fairly strong stomach to digest the implied levels of cash burn and additional net debt required to avoid cutting the dividend.
Equally, using the same logic it would appear that now is not an especially good time to purchase Exxon stock because oil prices are not yet in the toilet while the shares are also still within $10 of their record high. That is a fair sentiment but comes with the caveat that the company has been using the past 12-18 months to fix the roof while the sun is shining. I mean, Exxon made over $55 billion in net income last year thanks to the double whammy of historically favorable upstream and downstream margins. It generated over $25 billion of surplus cash after spending a combined $30 billion on cash dividends and the resumption of the share buyback program.
In 2020, Exxon Mobil entered the oil industry bear market with around $47 billion in debt and little over $3 billion in cash on its balance sheet. Entering 2023, gross debt was still around $40 billion but the cash balance had grown to nearly $30 billion. That is going to afford the company a lot more flexibility during the next downturn compared to the last one. Back then, Exxon had been unable to repurchase meaningful amounts of stock in the four years prior due to cashflow and balance sheet constraints. Today, Exxon has already spent $15 billion in the past 12 months on share repurchases and plans to spend $35 billion over the next two years, for a cumulative total of $50 billion over the 2022-2024 period. There is going to be a nice cushion for stockholders provided by the lower share count when earnings and return on capital inevitably retreat to the $25 billion and 15% area that is commensurate with mid-cycle conditions. What’s more, there will be scope for the firm to operate a higher degree of counter-cyclical financing moves compared to the 2015-2020 period. That strikes me as significant given that historically this was the main factor that unlocked serious wealth creation going back to the Standard Oil days.
Two things stand out to me when contemplating the implications of the above on the medium-term outlook here. Firstly, I think there is a good chance that the next downturn will be a milder one from the perspective of Exxon stock because of the company’s improved balance sheet position and dividend safety. Secondly, should the 2023-2032 period allow for a fair apples-to-apples comparison in terms of the industry cycle then there is a very strong case that it will represent a step-up from 2014-2022 period as the key ingredient of being able to act counter-cyclically once again returns to management in Houston.
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