Are ExxonMobil's Share Buybacks Helping Shareholders?

A stock that wants to reward its shareholders with real cash returns does so through two methods: dividend payments and share buybacks. Each have their advantages, and certain investors favor one or the other depending on their particular investment goals. Dividends are obviously a great way to produce income from your investments, as those quarterly payments are cash in the shareholder's pocket that can then be used to pay for life's many expenses.

Share buybacks are valuable in their own right. When used properly, they can reduce the number of shares outstanding, thereby making each remaining share more valuable by boosting earnings per share. A company that does both is usually a great find, and energy giant ExxonMobil (NYSE: XOM  ) is one such company. However, share buybacks can be mismanaged, and if so, don't always work to the benefit of shareholders. This is precisely why ExxonMobil's share buyback strategy should be called into question.

Not all buybacks are beneficial
As previously mentioned, share repurchases can create value for shareholders when done well. At the same time, if management simply offsets share repurchases with an equal (or greater) number of option awards, then shareholders aren't actually better off.

ExxonMobil has spent a massive amount of money on share buybacks over the past several years, which is truly an impressive feat on the surface. Exxon repurchased $4 billion of its own shares in the most recent quarter, $5.6 billion worth in the first quarter, and prior to the second quarter, had bought back at least $5 billion of its own stock for ten consecutive quarters. Going further back, Exxon has repurchased $210 billion of its own shares over the past ten years, a sum greater than the entire market capitalizations of all but 11 members of the S&P 500 Index.

Looking beneath the numbers, though, we can see that Exxon's buybacks aren't all that accretive to shareholders. As of the 10-year period ended June 30, 2013, Exxon only reduced its total shares outstanding by about 2.2 billion. Clearly, something doesn't add up. It appears that Exxon's share repurchase program leaves a lot to be desired, as option grants are significantly affecting the true impact of the buybacks. The huge amount of money being allocated to share repurchases has come directly at the expense of dividend payments. Of the biggest oil companies in the world, Exxon's 2.9% dividend yield ranks as one of the lowest among its closest peers.

Other energy majors strike a balance
ExxonMobil has decided to rely heavily on share buybacks in its capital allocation program. While that's not a bad thing in and of itself, it is when a company isn't truly reducing shares outstanding. Other energy majors have struck a more favorable balance between share repurchases and dividend yield, and may be better choices for investors going forward. Meanwhile, other energy giants have struck a more favorable balance between dividends and share buybacks.

For example, Chevron (NYSE: CVX  ) repurchased $1.25 billion of its own shares during the first and second quarter of 2013. Chevron spends a relatively modest amount on share buybacks, but takes dividends more seriously than Exxon. Chevron yields 3.3% at its current price.

Even higher dividend yields than Exxon's or Chevron's can easily be found within the energy sector. Take BP (NYSE: BP  ) , which has bought back just $2.9 billion of its own stock year to date. And, going forward, the company plans a relatively modest $8 billion share buyback program. Instead of relying on buybacks, the company offers its investors a much bigger dividend, which yields 5.2% at recent prices.

At this point, investors should seriously question whether Exxon's share repurchases are designed to truly increase shareholder value, or whether it's just a thinly veiled attempt to enrich executives. Other energy majors take dividends much more seriously than Exxon, and as a result, may be more worthy of your hard-earned investing dollars.

Buffett's energy choice
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 2.19 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (1) | Recommend This Article (0)

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 October 08, 2013, at 3:38 AM, zebrawud wrote:

    Can you explain more about the options? What they are and Why Exxon is doing that?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2671064, ~/Articles/ArticleHandler.aspx, 11/27/2014 11:30:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement