As I wrote in my analysis of CVX, oil prices are declining. And that’s way lots of great companies are on sale. Yes, now it is only up to me to pick the right one. Before the market opens in New York I will make a quick analysis of some Oil stocks.
Lets take a look at a company that is paying dividend for 32 consecutive years in a row. An oil company that is over 100 years old. It is an American multinational oil and gas corporation and a direct descendant of John D. Rockefeller’s Standard Oil Company.
This analysis is on Exxon Mobil Corporation (XOM).
Company (from google finance): A manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. The Company has a number of divisions and affiliates with names that include ExxonMobil, Exxon, Esso or Mobil. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products.
Can I explain this to a 10-year old? What Does This Company Do?
XOM is a company that extracts oil from the earth and refines it, so it can be used as gasoline for our car (and all sorts of different oil products).
Dividend Aristocrat: XOM is paying Dividend for 32 years in a row! And is a Dividend Champion. Its number 81 on the CCC-list from David Fish! And is a 4 star stock on Morningstar.com. This looks like a fine and solid investment. That’s a Pass!
Dividend Yield > 2.5%: The dividend Yield of XOM is 3.0%. This is below the industry average of 4.1%. But it is above the 5 years average (2.4%). The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 36%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. Great, keep the dividend rolling in! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 and 10 years are 12.8, 12.2, 9.7 and 9.6. With a 3 years average over 12%, I get excited. DGR also passed the fourth Pollie-code.
P/E-ratio < 15: XOM has a current P/E ratio is 11.4. And is lower then their 5 years average (12.3). It is above the industry average of 10.5%. If we look at the current ratio we can say that is below the requirement of the Pollie-Code. Therefore this is a pass on the Pollie-code.
EPS > 0: The EPS is 7.85. So XOM also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 12.5%. Another pass.
Market Cap. > 100M: No problem at this point. More than $ 412.438 Mil. It is one of the largest companies in the world (by revenues). Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 12.5. This is therefore a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk. high and low are: 104.76 and 86.91. This means that XOM will be in my buying zone when the stock price is below 100.30 ((104.76-86.91)*0,75 + 86.91). At this moment XOM is trading for $90.54. Therefore it is a pass on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for XOM is 0.89.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to GE with D = $2.76, G = 5%, and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $60. At this moment Xom is trading above its intrinsic value.
Conclusion: When I look at the analysis, Xom passed 10 out of 10 from the Pollie-code! Wow that’s great. If we take a look at Gordon Growth Model we can see that the stock is trading in the overvalued zone. But XOM is trading near the zone of their 52 week low. The tumble in the oil prices last week and hopefully this week gives a great buying opportunity.
And am I the only DGI who is buying oil stocks? You probably know the answer is No. A lot of fellow DGI bloggers are taking advantages of this dip in the market.
XOM is a great company at this moment. But when compared to CVX my preference goes to CVX. CVX has a higher yield and a lower P/E ratio. But both companies are great to have and can be a cornerstone of a portfolio for years to come.
I’ll keep XOM on my watch list.
What are you – the readers, thoughts on Exxon Mobil Corporation? Is it a buy, do you own it?
Please comment on my analysis and thanks for stopping by!