Dividend Aristocrats: Time to Buy ExxonMobil?

If you are looking for the 1% for stocks, then you will find them among the Dividend Aristocrats. Over the years, ExxonMobil (XOM 0.23%) has been among the highest class of wealth building investments out there. When buying a company like ExxonMobil though, the better question is not if, but when, because the right timed investment can yield spectacular returns while a poorly timed one can have you wondering how so many people have made money with this company. Let's take a quick look at ExxonMobil's track record as a Dividend Aristocrat, its prospects of remaining in this investment upper-class, and whether buying shares today is the right move for you.

The Classiest of investments: Dividend Aristocrats

Dividends are those beautiful things that put cash in investors' pockets on a quarterly basis (or monthly in some cases), or for those with a long-term outlook a way to increase your stake in the company by automatically reinvesting those dividends. Almost any company can pay a dividend as long as it has a little excess cash lying around after maintaining and growing the business, but it's a whole other creature to sustain that over a long period of time. That's where Dividend Aristocrats separate themselves from the rest. To qualify for the title Dividend Aristocrat, a company needs to not only pay a dividend, but steadily increase that dividend payment over a period of 25 years or more. Of all the companies publicly traded on the U.S. exchanges, only 51 of them qualify to be dividend aristocrats.

Does ExxonMobil qualify? Yes and then some. In fact, ExxonMobil qualified as a Dividend Aristocrat all the way back in 1965 and it hasn't looked back since. For 74 years the company has steadily paid and increased its dividend -- split adjusted, of course.

Is ExxonMobil worth buying today?

If the past three quarters of a century weren't enough to convince you that ExxonMobil has a pretty solid business model, then let's take a better look at it. First, global demand for energy over the next several decades is immense. According to the U.S. Energy Information Administration, global energy consumption is expected to almost double by 2040, most of it coming in the developing world.

Source: US Energy Information Administration

While our energy mix may change significantly over that time, the overall demand for oil and gas should remain strong. The second reason to be optimistic about ExxonMobil's future is that it has a large, diversified portfolio of investments that will increase production as well as increase refining and chemical manufacturing capacity. The combination of these two parts of the industry not only increases revenue and earnings, but it also helps to protect against the volatility of oil prices over the long term. 

Finally, ExxonMobil's ability to generate free cash flow from its business better than most in the industry really separates it from the rest. Over the past five years this innate ability to generate free cash has allowed the company to produce returns on invested capital more than five percentage points higher than its next closest peer, and it's very likely that this is one of the reasons that Warren Buffett bought close to $3.5 billion in shares a little more than a year ago.   

Source: ExxonMobil Investor Presentation

The one thing that might dissuade an investor from buying ExxonMobil is that performance for both it and the rest of its integrated oil and gas cohorts haven't exactly performed up to par over the past few years, even on a total return basis -- share price appreciation plus dividends.

XOM Total Return Price data by YCharts

This has a lot to do with the fact that most of these companies have lots of money tied up in projects that aren't yet producing, so performance relative to the rest of the market looks a little weak. Once these new projects are online it could significantly boost earnings and returns, which could also result in share price appreciation.

One other thing to keep in mind when buying shares of ExxonMobil -- and just about every Dividend Aristocrat for that matter -- is that you can make your best gains by finding the right time to buy when shares are cheap. Comparing ExxonMobil to its average historical valuation, it pretty much falls right in the middle. The only thing that really seems to indicate a slight undervaluation is that its price to tangible book is pretty low, which goes back to all those projects under development

Source: S&P Capital IQ

What a Fool believes

ExxonMobil is one of those stocks that very few will argue is a poor long-term investment. With Exxon's current dividend yield of 2.8% and a 74 year history of adding to that payout, ExxonMobil looks like a pretty solid company with a big future ahead of it in the oil and gas business. For an investor looking to get a screaming deal on ExxonMobil's shares, today may not be the day. However, all it takes is some media attention spelling the doom of the oil industry to send shares lower, and those who set aside some cash for one of those moments could find themselves with one of the best wealth building companies on the market.