A Brief History of ExxonMobil's Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

1. Dividends.
2. Earnings growth.
3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, ExxonMobil (NYSE: XOM).

Exxon has returned a total of 134% over the past decade. How'd it get there?

Dividends accounted for a lot of it. Without dividends, Exxon shares returned 87% over the past decade.

Earnings-per-share growth was strong over this period, growing at an average of 13% a year. That's well above the market average, and almost unheard of for a company Exxon's size. Most of the growth has been tied to the rising price of oil, but there's more to it than that: Exxon's management has done an extraordinary job allocating capital, investing in the right areas, and growing the company's earnings power year after year.

But amid those powerful internal results, shareholders have had to grapple with a more commanding force: A 40% fall in Exxon's earnings multiple:

Source: S&P Capital IQ.

This same phenomenon of compressing valuation multiples has taken place at competitors Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP). Part of the decline has been a function of broader market trends; large-cap stocks were overvalued 10 years ago, and the past decade has been a reversion to normal. The oil spike and collapse of 2008 spooked investors and proved that there are no certainties in energy markets, but by and large, big oil companies have been remarkably successful at generating cash and keeping earnings and shareholder returns at attractive levels. After falling for most of the past two years, paying a current multiple of 9.7 times earnings for a company like Exxon is likely to be a good bet for patient, long-term investors.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

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