ExxonMobil? Think Again
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General Electric’s collapse should have served as a reminder that buying a company based solely on past reputation and dividend yield is a dangerous endeavor. GE is also a great example that dividends are not paid out of earnings, especially massaged-to-death non-GAAP earnings, but from free cash flows. GE’s non-GAAP earnings were double its dividend payment.
This brings us to another American icon of the past: ExxonMobil. It was clearly one of the most respected oil companies in the world. Its stock was passed from generation to generation, with a deathbed whisper “Never sell Exxon.” And for a long period of time, if you listened to that whisper, you grew richer as Exxon continued to grow its earnings, raise its dividend, and buy back stock.
These days are long gone. Today Exxon is riding slowly into the sunset.
The company has been in self-liquidation, but investors never got the memo. Over the last 10 years ExxonMobil spent $275 billion returning money to shareholders through dividends and stock buybacks, while it earned $318 billion of net income. On the surface these numbers look great. There is only one problem: Exxon’s reported earnings dramatically overstate the company’s true earning power. Finding new oil and extracting it has become much more expensive, and thus Exxon’s capital expenditures – the cash it spends on replenishing reserves and extracting oil – significantly exceed the company’s depreciation expense (an income statement number).
ExxonMobil’s cumulative free cash flows – the cash earnings left after the company has paid for replenishing reserves and extraction – were only $183 billion over the last 10 years, not enough to cover its giant, 10-year $275 billion return of capital to shareholders – a shortfall of almost $100 billion. To finance dividends and buybacks, Exxon had to leverage its balance sheet. Over 10 years the company went from floating on $24 billion of (net) cash to drowning in $38 billion of net debt.