Recent Buy – Novermber (Part 3)

On 9th November, I bought 262 stocks of the Exxon Mobile (XOM) at an average price of $83.49. Dividend yield of this purchase is about 3.69%. Exxon Mobile pays quarterly dividend of $0.77 (paid in the month of February, May, August and November). Dividends will be reinvested back in this Blue Chip company.

Total invested capital is $21,874.38.  This purchase will increase the TDK’s Annual Dividend by $806.96.  My plan is to report TDK’s regular dividend income each month starting first or second quarter of 2018.

First of all, I want to clarify that I generally don’t buy with two hands on any company when I open a position with any company.  I don’t think it is a good idea to do so either despite how confident you feel about the value of the stock.  On the contrary, I’d rather prefer smaller capital investments made consistently over a period of time to create larger position within any company.  The primarily reason behind this being the fact that the stock prices are bound fluctuate in short term so to avoid local highs and to possibly capture some local lows, dollar cost average is a really good process.  This purchase was actually made in form of several smaller purchases, however, for simplicity purposes I am reporting the average of all smaller purchases made within XOM.

My general rule is to have no more than $20 K in any company.  While I am bit heavier than otherwise I would like to be, I feel pretty comfortable being bit heavy with Exxon Mobile (possibly even heavier in future) specially because I believe in uptrend of oil prices moving forward in next couple of years.

Key Factors for XOM:

Forward PE is at about 20 which is pretty high and is too high compared to ttm PE or about 26, in other words, 13% growth in earnings expected for year 2018, which I believe company will beat without any trouble. The cyclic companies often have pretty high PE ratios specially near bottom of the cycle so generally PE is not such a good parameter to go by while determining investing decision.

For cyclical companies, typically PE expands at the bottom of the cycle and contracts at the top of the cycle. In other words, cyclical company looks more lucrative buy at the top of the cycle and looks overpriced at the bottom of the cycle. However, since we can’t be sure if PE will continue to expand or not, PE can’t be considered very reliable for cyclic companies. For example, XOM was trading close to $103, while PE at the time was barely 13.  Other parameter I like to check is to look at is the book value times the ROA or total earning per entire cycle.

BV X ROA is about $44 for XOM, while the same ratio for CVX is at  $21.60 (due to pretty low ROA for CVX).

The way I like to think about cyclic companies like XOM is to look at the earnings over one complete cycle and normalize it over one period of time. In this case, XOM reported the net income of about $45 B in 2012, down to about $8 B in 2016, down each year since 2012.  In 2017, for the first three quarters alone the reported net income stands at 11.5 B, reinforcing the thesis of uptrend in earnings.

Pretax net income is down from about $79 B in 2012 to $8 B in 2016. I like to pay no more than 10% of EV (enterprise value) to pretax earnings  of a company when I invest in a company. By nature of cyclic companies, in 2013 and 2014, this ratio (or any other valuation ratio) for XOM would’ve looked very attractive. Also, today this ratio looks way too high but again I like to normalize the earnings over one cycle (or half cycle) and verify the uptrend before getting in.  If we add EBIT of each year since 2012 (half the cycle) and normalize it per year basis, it comes out to be about $44 B coupled with current EV of $390 B, EV/EBIT ratio is 8.9%.  Now lets check if the uptrend seem imminent ?  In 2017, for the first three quarters alone, EBIT stands at $16 B, double compared to the entire 2016 EBIT, thereby reinforcing the thesis of uptrend.

Despite all downtrend from 2012, outstanding shares have reduced from 4.63 B in 2012 down to 4.18 B, consistently reduced at a rate of 2.5% annually.

Current Ratio is at 0.83. This ratio is pretty low and this is the only thing I really don’t like about XOM Currently.  

Payout Ratio is at 101%, when its compared with trailing twelve months of earnings, which obviously is not-sustainable.  In other words, if company is unable to increase its earnings in a year or two, then either it will have to borrow money to pay dividend that grows each year or may have to cut its dividend although I highly doubt company will cut its dividend.

Operating cash flow for year of 2016 was about $22 B.  Operating Cash flow for the trailing twelve months was $30 B.  This means, company is able to generate about 9% its market value in operating cash flow each year. Not bad for a energy company in low oil price environment.

I am also looking to add some more stocks in coming days/weeks.

What are your thoughts on this purchase ? What are the stocks you are buying or looking to add ?

This Post Has 2 Comments

  1. I think Exxon and oil stocks are a great buy in general. Oil companies are finally getting their finances in order after 2014-2016, and I expect the oil sector to lead the market over the next few years.

    1. Thanks Troy, I agree that next two to three years now will be good years for oil companies.

      Good Luck and happy investing. Thanks for stopping by.
      TDK.

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