How ExxonMobil Corporation's Share Buybacks Signal a Slow Recovery

For many years, energy juggernaut ExxonMobil (NYSE: XOM  ) was known as a titan of shareholder rewards. It has maintained a long track record of showering cash on its investors. What you may not know, is that lately, ExxonMobil's cash returns aren't as impressive as they seem. The first reason for this is that ExxonMobil holds one of the lowest dividend yields in the energy sector.

Management had previously made up for this by using a significant portion of the company's cash flow on massive share buybacks. ExxonMobil historically compensated investors with much greater buybacks than other oil majors like Chevron (NYSE: CVX  ) . But in recent quarters, ExxonMobil has cut its share repurchases by several billion dollars. The end result is that while ExxonMobil is still a company that sends back cash to its shareholders, you're not getting as much cash as you might think.

Dwindling capital returns a cause for concern?
In the integrated energy space, ExxonMobil is as big as they come. And, on the surface, the total amount of cash that the company returns to shareholders each and every quarter is truly staggering. Last year alone, ExxonMobil distributed $26 billion to investors through dividend payments and share buybacks. Of this, about $15 billion was from share repurchases, which towers above Chevron's relatively paltry $5 billion in buybacks in 2013. For ExxonMobil, the trend in share buybacks over the past several years is what concerns me.

ExxonMobil had maintained a streak of ten consecutive quarters in which it spent at least $5 billion on share repurchases, which lasted through the first quarter of 2013. Since then, its repurchases have steadily declined. Exxon bought back $4 billion worth of its shares in the second quarter, and just $3 billion in the third and fourth quarters.

Unfortunately, the company isn't off to a great start this year, either. Share repurchases totaled $3 billion again in the first quarter. This isn't necessarily unwarranted, of course. ExxonMobil, like other integrated majors, is grappling with field declines and a horrible environment for refining. Profits dropped 4% in the first quarter, to $9.1 billion, so a shift in attitude toward conservatism isn't unreasonable.

How much cash a management team allocates toward its capital return program can be seen as an indication of confidence. The fact that quarterly buybacks have fallen 40% over the past few years isn't a great sign. Indeed, ExxonMobil is still facing some serious headwinds.

In its first-quarter earnings presentation, management didn't have resoundingly positive things to say about the state of the current business environment. Growth in China is flattening, and the company notes only modest growth in other major geographies like the United States and Europe. On the downstream side of the business, spreads between West Texas Intermediate and Brent crude continue to narrow, which is crushing refining margins. And on the upstream side, field declines are offsetting production growth from new project ramp-ups.

As a result, you shouldn't expect to see $5 billion in quarterly share repurchases any time soon. Fortunately, ExxonMobil also pays a solid dividend, although other integrated majors have more to offer you on that front.

Dividends don't make up the difference
You might think a company that distributes $26 billion to its investors tops the list in terms of shareholder-friendliness. But it needs to be mentioned that ExxonMobil is a gigantic company, and on a per-share basis, it's actually not keeping up with other energy giants. With its declining level of share buybacks, ExxonMobil would have to make up the difference with a high dividend. But ExxonMobil's dividend yield stands at just 2.7%, below Chevron's 3.4% yield. This even includes ExxonMobil's recent dividend increase.

The key takeaway is that while ExxonMobil still distributes a ton of cash to shareholders, the downward trend in share buybacks signals a lack of confidence from management. Buybacks have long been a major component of how ExxonMobil rewards investors, but the pace of buybacks is slowing. To me, that implies that the headwinds that have depressed profits over the past couple of years are still intact.

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