Is ExxonMobil the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if ExxonMobil (NYSE: XOM  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at ExxonMobil.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.8% Fail
  1-Year Revenue Growth > 12% 22.9% Pass
Margins Gross Margin > 35% 32.3% Fail
  Net Margin > 15% 8.3% Fail
Balance Sheet Debt to Equity < 50% 12.6% Pass
  Current Ratio > 1.3 1.01 Fail
Opportunities Return on Equity > 15% 21.6% Pass
Valuation Normalized P/E < 20 11.97 Pass
Dividends Current Yield > 2% 2.4% Pass
  5-Year Dividend Growth > 10% 9% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With five points, ExxonMobil puts in a decent performance. But nothing about the energy industry has been average lately, and it appears that ExxonMobil and its peers could have interesting and profitable times ahead.

Once a company gets as big as ExxonMobil, it's unusual to see fast growth -- the amounts of money involved are simply too great. ExxonMobil will never be able to match the consistent quick growth rates of smaller energy-related companies like ATP Oil & Gas (Nasdaq: ATPG  ) or National Oilwell Varco (NYSE: NOV  ) , if only because of the law of large numbers.

But because the energy giant is sensitive to prices of oil and gas, you can still see big swings in ExxonMobil's sales figures from year to year. Oil prices in particular have been extremely volatile in recent years, ranging from highs above $145 per barrel to lows around $30. But they've moved up again lately to breach the $90 mark, and energy stocks are enjoying the extra business.

With dividend investing becoming hugely popular, ExxonMobil is an obvious choice for those seeking healthy payouts. Even here, though, you'll feel the effect of the company's gargantuan size; competitors Chevron (NYSE: CVX  ) and ConocoPhillips (NYSE: COP  ) both have higher dividend yields and have grown their payouts at a faster pace in the past five years.

Going forward, ExxonMobil's future success may rely more heavily on the fate of natural gas, which has been stuck at low prices despite oil's rebound. The company's purchase of gas producer XTO Energy added a great deal of exposure to the cleaner-burning fuel, and the buyout may look like the ultimate bargain if the industry sees better pricing.

In the meantime, you can collect quarterly dividend checks while also getting a partial hedge against higher energy costs. That may not make ExxonMobil the perfect stock, but it could still be a useful part of your portfolio.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add ExxonMobil to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. National Oilwell Varco is a Motley Fool Stock Advisor selection. Chevron is a Motley Fool Income Investor pick. The Fool owns shares of ExxonMobil. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2010, at 2:17 PM, PeyDaFool wrote:

    Dan,

    What about stock buybacks? Exxon may not have huge dividend payout increases over time, but they certainly add to shareholder value with buybacks.

    I may be missing it in your article, but I don't believe you account for this fact.

  • Report this Comment On December 31, 2010, at 3:24 AM, dblegl wrote:

    With all the stock buybacks how about a stock split? That would do more to promote the affordability, and thus the increase in sales of the stock than most anything. It served them (us) well for many years but I think they have forgotten how to spell SPLIT. The only thing they do with the stock buybacks now is give them to the officers and directors. I think they need to remember who owns the company.

  • Report this Comment On December 31, 2010, at 2:59 PM, PeyDaFool wrote:

    dblegl,

    Your ideas come way out from left field.

    1. One share of a $100 stock is exactly the same value as two shares of a $50 stock. Stock splits don't do anything to change the value of a stock.

    2. Are you talking about options? Stock buybacks are when the company uses profit to buy back shares, thereby lowering the amount of total shares.

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