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ExxonMobil: The Champion of Shareholder Returns

- By Rupert Hargreaves

Last week, I wrote an article on diversification and the need for it since most stocks do not actually produce a positive return over the long term.

The figures supporting this conclusion come from research by Arizona State University finance professor Hendrik Bessembinder, who studied the returns of 26,000 equities over the period of 1926 to 2015. He found 96% of stocks achieved nothing.

During this period, $31.8 trillion of wealth was created but just 4% of equities contributed to this massive gain. Of the total, Apple Inc. (AAPL) accounted for about 2% of wealth creation between 1926 and 2015. ExxonMobil Corp. (XOM) accounted for 3% of the wealth created. These figures got me thinking, if ExxonMobil has created so much wealth over the past 90 years, then surely it remains one of the market's most attractive investments. With this in mind, I am going take a look at ExxonMobil's long-term returns and the company's growth potential.

A record compounder

There is no denying ExxonMobil has been a massive compounder and wealth creator over the years. Over the past two decades, the business has produced staggering returns for investors.

About $10,000 worth of Exxon stock acquired in 1996 would have given you 475 shares. Twenty years later in April 2016, it was worth $37,600. That is excluding dividends or dividend reinvestment. This number also excludes share repurchases.


When Exxon merged with Mobil in 1998, there were just under 7 billion shares outstanding. By the end of 2015, this figure had fallen to 4.2 billion shares. That is a staggering 40% decline in the float over the period.

The dividend is where wealth has really been created. While the capital growth of ExxonMobil's shares has been nothing short of impressive, dividends are probably the single most important source of wealth creation for all market participants. In this case, it is no different.

It's all in the dividends

Going back to 1996 again, Exxon paid a split-adjusted annual dividend of 78 cents for the year. By 2015, the annual dividend had risen to $2.88, growth of nearly 300%.

Assuming no reinvestment over this period, the $10,000 initial investment would have paid out $13,680 in dividends. Add to capital gains of $37,600 and you get a total return of $51,280, an annual return of 8.5%. When you include dividends reinvested, the total return rises to $63,650, equivalent to a compound annual return of 9.5%.

A solid long-term buy?

There are two things to observe about this return. First of all, it is around the same as the market average. The annual return for the S&P 500 since its inception in 1928 through today is around 10% (maybe not the best comparison considering low-cost index trackers have not always been easily available to investors).

The second thing to note is the sustainability of this return. While other companies crashed and burned during the dot-com bust and global financial crisis, Exxon's shares have continued to churn out returns.

Will this trend continue? It is likely since ExxonMobil has what Warren Buffett (Trades, Portfolio) would call a defensive moat surrounding the business.

The economies of scale the company possesses allow it to extract natural resources at a fraction of the cost most smaller competitors can. What's more, the company can shift these resources around the world to consumers at a lower cost thanks to its vertically integrated operations. Strategically located refineries and chemical operations only add to the oil giant's competitive advantage as these massive infrastructure projects require billions of dollars to start up and maintain -- a price tag that is just completely out of reach for most of its competitors.

Furthermore, ExxonMobil's size allows it to remain profitable throughout all stages of the commodity cycle, which gives the business the option to buy distressed peers during downturns, increasing its resource base, growth potential and longevity.

Put simply, shares in ExxonMobil have been a highly lucrative investment in the past, and it looks as if they will continue to be so going forward as the company continues to hold an advantage over the rest of its oil sector peers.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.