It's the second largest publicly traded American company; it has received Warren Buffett's stamp of approval; and it's probably the most successful energy firm in history.
Yet in spite of these accomplishments, many retail investors tend to skip over ExxonMobil (XOM -2.78%).
At a glance, the logic makes sense. Exxon is the slowest growing and most expensive of its peers, and the company has the smallest dividend yield to boot. But these are all bad reasons to avoid the energy giant. So to nip these bad arguments in the bud, here are the top three mistaken reasons to sell ExxonMobil.
1) Exxon is growing too slowly
No doubt about it, Exxon is a slow-moving behemoth.
According to the company's own guidance, annual oil and gas output is expected to grow only 2% to 3% through 2017. But given the company's track record, that outlook is likely optimistic.
In contrast, other Big Oil names are expanding at a much faster rate. ConocoPhillips (COP 0.10%) is expected to post 3% to 5% annual production gains through 2017. Chevron (CVX 0.37%) is doing even better. The company is expected to grow production 6% annually during the same timeframe.
But production growth doesn't matter. As investors, we should only be concerned with the returns a business generates. Not how fast the company is expanding.
Sometimes those two factors are synonymous. Sometimes they're not.
Exxon's management team isn't interested in growth for the sake of growth. If there's an opportunity that generates a sufficient return for shareholders, they'll take it. But if there aren't enough good projects, management is happy to return excess capital to shareholders.
This means higher returns for investors over the long haul. Over the past five years, Exxon has generated an average return on capital employed (one of the better benchmarks to measure a company's performance) of almost 25% per year. That's the highest of its peers.
Exxon isn't the fastest grower. However, the company is the best capital allocator in the business. It's not clear if Exxon's rivals have this discipline.
2) Exxon has a small dividend yield
Weighing in at over $400 billion, Exxon has the second largest market capitalization of any publicly traded American company. But income investors would hardly describe the company's yield as titanic. At a meager 2.6%, Exxon's dividend is hardly drool-inducing.
Many would prefer to hold ConocoPhillips, which pays out an impressive 4%. Even Chevron yields a tasty 3.3%.
But there are two ways a business can return capital to shareholders: dividends and buybacks. To skip the other side of this equation would be a mistake.
Year to date, Exxon has bought back $12.65 billion in stock. And over the past decade, the company has repurchased nearly half of its outstanding shares. When you factor in the company's buyback, Exxon's adjusted yield looks better than its competitors.
| Company | Dividend Yield | Adjusted Yield |
|---|---|---|
| Chevron | 3.3% | 5% |
| ConocoPhillips | 4% | 3.8% |
| ExxonMobil | 2.6% | 6.7% |
Source: Yahoo! Finance
In fact, on an after-tax basis Exxon's policy is even better. That's because a buyback increases our stake in a wonderful business while deferring taxes until we chose to sell. In contrast, dividends are taxed immediately and possibly at a higher rate.
3) Exxon is too expensive on a price-to-earnings basis
Finally, Exxon doubters often point out that the stock trades at a premium to peers on a price to earnings, or P/E, basis. At 12 times trailing profits, the company is certainly more expensive than comparables.
| Company | Price/Earnings Multiple |
|---|---|
| ConocoPhillips | 10.4 |
| Chevron | 10.0 |
| ExxonMobil | 12.9 |
Source: Yahoo! Finance
But the truth is this metric is somewhat irrelevant. GAAP earnings usually don't accurately reflect the health of a business.
Rather free cash flow and EBITDAX (earnings before interest, taxes, deprecation, acquisitions and exploration) are the preferred metrics to benchmark valuations in the oil business. On a price-to-free-cash-flow or EV/EBITDAX basis, Exxon is trading well in-line with its peers.
Foolish bottom line
This is not a case to buy ExxonMobil over the company's rivals, and there are many cases to be made against the company or for its peers. But please, everyone, stop using these three arguments to justify selling the oil giant.
