"It's the world's greatest company, period."
-- Arjun Murti, Goldman Sachs analyst
I'm what a lot of folks would call "obsessed" with finding great stocks. So when I heard Goldman Sachs oil oracle Arjun Murti boldly label a company as the world's greatest, you'd best believe I paid attention.
That's pretty high praise, but the facts speak for themselves. In fact, my research led me to take Murti's claim one step further: This is the greatest company in the history of the world.
The corporate titan in question produced modern-day history's greatest fortune, and earned double the combined 2008 profits of Cisco Systems (Nasdaq: CSCO ) , IBM (NYSE: IBM ) , and PotashCorp (NYSE: POT ) . If you'd invested $1,000 in this company in 1950, your shares would now be worth about $2.2 million. And incredibly, this giant still has decades of slick profits ahead of it.
Meet the world's greatest company: ExxonMobil. Biggest, strongest, most efficient, most evil -- there's hardly a superlative that hasn't been applied to this most successful of the Standard Oil grandchildren. But while much is made of just how great or how evil folks peg Exxon to be, there's strangely little discussion over the core drivers of why its stock has been a huge success.
It would be easy to say that Exxon's success, and that of Standard Oil's lineage -- Chevron, ConocoPhillips, etc. -- was just a function of being in the right place at the right time. Hawking oil and gasoline at the dawn of the Industrial Revolution, after all, is a Category 5 tailwind.
But there's much more to Exxon's success. Fortunately, we can also spot those discernible traits in other opportunities.
1. An owner-operator culture
John Rockefeller didn't run an infamously efficient organization just for kicks. As the largest shareholder, he had a vested interest in the success of Standard Oil. When managers and employees are shareholders alongside you, they share your desire to manage the business for the long term.
Take a look at the cutthroat world of big-box retail, where smart growth and a fanatical focus on controlling costs are crucial to long-term success. Which companies in this space have ranked among the biggest winners for investors over the past 20 years? Costco and Wal-Mart. Both are known as much for their insider ownership as for their tenacious zeal for efficiency and maximum value.
By the way, there's still plenty of alignment between Exxon's leadership and outside shareholders. The company consistently posts better margins and returns on capital than its Big Oil brethren. CEO and Chairman Rex Tillerson has plenty of incentive to keep it that way; he owns 1.1 million Exxon shares.
2. Enduring demand
Demand for oil is strikingly consistent. For most companies, steady demand equates to steady cash generation. But for Exxon, the consistency of demand for oil is just as important as the duration of that demand. Constant doubts about the staying power of oil have helped keep Exxon's shares perpetually undervalued, allowing Exxon and dividend reinvestors to steadily gobble up shares at attractive prices.
For another case study in the importance of demand, consider Procter & Gamble, which I recently recommended to Income Investor members. P&G's core products (razor blades, toilet paper, disposable diapers, etc.) all face little chance of technological obsolescence. Better yet, demand is regular and firmly entrenched. Maybe I'm just a pretty boy, but I'd be living in my car before I stopped buying razors.
Now consider companies whose fates hinge on innovation, such as search player Baidu.com (Nasdaq: BIDU ) or solar stars First Solar (Nasdaq: FSLR ) or Solarfun (Nasdaq: SOLF ) . As anyone who once relied on Alta Vista or Yahoo!'s search engines can attest, staying the top dog in search for any meaningful period of time is exceedingly difficult. As for solar, color me bullish on the industry and bearish on the companies. The technology is changing at a breakneck pace, making predictions of where the industry, let alone a single company, will be a decade from now a total shot in the dark. Exxon, however ... well, I'm pretty confident about what it will still be doing in 10 years. Call it a hunch.
Again, historical results say it all here. According to dividend guru Jeremy Siegel, among the highest-returning S&P 500 stocks from 1957 to 2003 were:
- Kraft Foods
- R.J. Reynolds Tobacco (now owned by Reynolds American (NYSE: RAI )
- Standard Oil of New Jersey (ExxonMobil)
Cheese. Tobacco. Oil. Coke. I think you get the picture.
3. No one loves a sinner
Some folks feel a bit queasy about investing in so-called sin stocks: tobacco companies, brewers, Big Oil, etc. Just like the long-standing (and false) belief that oil demand will dry up in the not-so-distant future, many investors' aversion to investing in sin stocks just leaves the stocks that much cheaper for the rest of us. Their loss. Our gain.
As an investor, you'd rather laugh with the sinners than cry with the saints. Again, consider the primo status of oil and tobacco on the above list. Care to guess the best-performing survivor of the S&P 500 from 1957 to 2003? None other than Philip Morris, former behemoth parent of what are now known as Altria and Philip Morris International.
And here you thought Exxon's secret sauce was a blend of industrialization and cold-blooded ruthlessness. OK, sure, maybe there's a pinch of both in there, but plenty more was involved in the company's success. Take that knowledge forth, Fool, and:
- Look for owner-operator cultures and management teams motivated to focus on long-term results.
- Know that steady, lasting demand helps deliver expectation-beating results over time.
- Don't be afraid to snuggle up with sin stocks.
James Early is looking for similar opportunities over at our dividend-focused newsletter service, Income Investor. Specifically, he's searching for undervalued stocks boasting impressive, durable competitive advantages with a nice dividend to boot.
Exxon is a great company -- but because we're hunting for tastier yields, it hasn't made the cut as one of our elite Buy First recommendations. To find out which six dividend giants made our final cut, you can click here to try our service free for 30 days.
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This article was first published April 9, 2009. It has been updated.
Senior analyst Joe Magyer owns shares of Procter & Gamble and Philip Morris International. Procter & Gamble is an Income Investor recommendation, as is Coca-Cola. Wal-Mart and Coca-Cola are Inside Value recommendations. Costco is a Stock Advisor selection. Suntech Power is a Rule Breakers pick, as is Baidu.com. The Motley Fool owns shares of Procter & Gamble and Costco. Philip Morris International is a Global Gains selection. After getting through all that, The Motley Fool's disclosure policy needs to go lie down for a bit.