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ConocoPhillips Message Board

  • e7navy1999 e7navy1999 Nov 18, 2013 4:57 PM Flag

    XOM vs COP

    I still am scratching my head as to why Mr Buffet decided on XOM. COP pays a better dividend and has a lower P/E plus the most efficient production processes. I guess Berkshire already owns a chunk of COP.

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    • I think this answers my question but I do not entirely believe it.

      In the oil industry, we have a handy metric to determine how well a company is managing our money: return on capital employed, or ROCE. The ratio measures how much cash is going into the business versus how much is coming out. And this is important in industries that consume a great deal of capital such as airlines, semiconductors, or energy.

      What Exxon has that its competitors don't is discipline. The company only allocates capital to its highest returning projects. If management can't find enough ventures that meet a very high bar for profitability, they will return excess capital to shareholders through dividends and buybacks.

      Exxon's rivals, in contrast as evident above, are a little too eager to redeploy that capital into lower return ventures. Guiding over a larger business empire may stoke boardroom egos, but merry executives never funded anybody's retirement.

      Sure, like its competitors, Exxon could grow faster. But that would require costly investments, and shareholders may be able to find better returns elsewhere. The fact that management acknowledges this reality is probably the main reason why Buffett chose Exxon Chief Executive Rex Tillerson over his peers.

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