On Thursday November 14, news broke that Berkshire Hathaway (BRK.B 0.54%) recently established a roughly 40 million share position in ExxonMobil (XOM -0.09%).
The roughly 40 million share position amounts to about 1% of ExxonMobil's total outstanding shares and makes up around 4% of Berkshire Hathaway's portfolio in dollar terms.
Purchase fits Buffett strategy
Warren Buffet's strategy is well known. He likes to buy companies with large moats, competitive advantages, and predictable cash flows that will be around for a long time.
The ExxonMobil purchase fits very well with that strategy. As the largest non-government owned oil company, it has immense economies of scale, considerable expertise in complex projects, numerous government connections, a fortress-like balance sheet, and a low cost of capital.
In terms of dividend predictability and share repurchases, ExxonMobil is unmatched. The oil giant has paid a dividend every year since 1911 and has raised its dividend for 31 straight years. The company has also spent an astounding $207 billion in share repurchases over the past decade. That $207 billion in share buybacks is larger than the market capitalization of all but 11 components of the S&P 500.
ExxonMobil also fits another Warren Buffett criteria, which is having low share price volatility. According to the Yale paper, Buffett's Alpha , the secret to Warren Buffett's success is that he buys low volatility stocks that don't fall very much in bear markets but perform similarly well in bull markets and levers them up with low cost insurance float.
Because his insurance float is at little to no cost, Buffett does not need to have his stocks outperform to beat the market . He just needs them to fall less in bear markets.
ExxonMobil is often regarded as a high-quality defensive stock. Its shares, which have a beta of 0.57, do not fall as much as the market when things go bad. As an example, in 2008, when the S&P 500 fell 38%, ExxonMobil shares fell only 15%.
The bottom line
What may be right for Warren Buffett may not be the perfect choice for regular investors. Buffett does not need ExxonMobil to outperform to do well.
It is, however, a very encouraging sign that the Oracle of Omaha decided to invest in ExxonMobil. While his investment in ConocoPhillips did not turn out the way he wanted, Buffett has shown investing acumen around the oil patch. Ten years ago, he bought a 1.3% stake in PetroChina (PTR) for $408 million. Five years later, he sold those shares for $4 billion, realizing a gain of 800%.
ExxonMobil stock is currently lagging the market. Its shares are up 13.6% compared to the S&P 500's 28% advance year to date. I believe the news that Warren Buffett is a major shareholder in ExxonMobil is a catalyst that could send the share price significantly higher. ExxonMobil investors now have more reason to be optimistic about the future.
