Earnings season is in full swing. In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman discuss ExxonMobil's (XOM -1.88%) recent decision to buy back $3 billion in stock. They also explain the three different ways that companies can use their cash to increase shareholder value, and talk about the growing trend of increasing stock buyback programs since 2010.
A full transcript follows the video.
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This video was recorded on May 11, 2017.
Sean O'Reilly: You brought something up really cool last week, when we were talking about Suncor Energy (SU -3.65%).
Taylor Muckerman: I did? [laughs]
O'Reilly: Yeah, it does happen. Your cool thing this episode was the soccer stuff. But we were talking about Suncor, and how they have really high hurdles for internal returns on projects. And I was like, "Why doesn't everybody do that?" And you were like, "I don't know." It's a fun question.
Muckerman: I said, "I don't know," in a humorous way because it makes sense.
O'Reilly: Right. It's just, I would love to see the internal spreadsheets, because you know they all have them. A business has three things they can do with money.
Muckerman: What's that, Sean?
O'Reilly: They can invest -- really?
Muckerman: Tell people.
O'Reilly: Oh, got it, sorry. "What's that, Sean?"
Muckerman: [laughs] It's a leading question.
O'Reilly: If Apple or Berkshire Hathaway or an oil company, anybody, and Berkshire has, what, $96 billion in cash?
Muckerman: There's a lot.
O'Reilly: He's trying to catch up to Apple.
Muckerman: He has to keep some of it for insurance purposes. But, yeah, around half of that or maybe a little bit more is definitely some funny money. Or, fun money, not funny money. It's real, but it's fun.
O'Reilly: Yeah, $96 billion is fun. But, bottom line, any company, you can either pay it out as a dividend, they can invest it in operations, or they can buy back stock. I'm including in operations, they're buying another company.
Muckerman: Yeah, M&A, capex.
O'Reilly: So, I'm very curious, you saw Exxon[Mobil] bought back $3 billion worth of stock in the quarter, you saw the dividend, they're both increasing their dividends, I want to know, because it requires some judgment as to what you think your stock is worth, to be doing that stuff. And by paying the dividend, you're saying, "We think our investors can make a better return," let's call it 8[%]-9%, or whatever you want to call it. "We're saying that our investors, after taxes, can do better with this money than we can internally." I would love to see what these guys think of all that. If they're doing it just for an obligatory reason, that kind of insults capitalism and such.
Muckerman: Yeah. Well, Warren Buffett addressed that.
O'Reilly: He has yet to pay a dividend.
Muckerman: Yeah, he's yet to pay a dividend. No one that I know of has asked him to pay one, because generally, they trust Warren Buffett.
O'Reilly: He beats that 8[%]-9% number.
Muckerman: Yeah. His annual return since Berkshire is like 17%, maybe 21%. Either way, it's crushing the market. But he's getting to that point where he's even starting to question --
O'Reilly: His ability to do it. And it's a size problem.
Muckerman: "Maybe I have too much cash to actually find opportunities to help people out."
O'Reilly: He's still as smart, it's just a size problem.
Muckerman: Yeah. And because he has a specific benchmark to where he'll buy back stock. It's not like he just wakes up one morning and is like, "I'm going to buy back stock today." It has to be 1.2 times book value, at that level where he's like, "OK, now I'm thinking about it."
O'Reilly: And it barely got there in the financial crisis, and that was it.
Muckerman: Yeah. I'm trying to find some numbers on some buybacks that we've seen. Share buybacks, we're looking at almost $160 billion in share buybacks right now.
O'Reilly: That's crazy.
Muckerman: Since mid-2010, it's been nothing but up and to the [right]. Back in 2010, it was less than $60 billion annually, or, rolling four-quarter average. Now, you're right around $150 billion.
O'Reilly: With the market at all-time highs.
Muckerman: With the market at all-time highs. I guess, yeah, you're buying share prices at higher values. That's going to increase the amount of money you're spending if you're buying a set number of shares. But, yeah, around $90 billion higher. Not that they bought $90 billion over that time period. But that the past rolling four quarters, they bought $90 billion more than they did in 2010.
O'Reilly: Yeah. In 2010, when all those buybacks started to roll out, I remember Disney announced a huge one and all that stuff, in 2010. I was wondering, "Where was this two years ago?"
Muckerman: Yeah, you saw the financial crisis, and people just stopped buying back shares. Took a nosedive.
O'Reilly: That's when you do it!
Muckerman: They waited until mid-2010, and it just hasn't abated since.