No. of Recommendations: 24
Most people here have no problem with OXY, XON, or KO sending a dividend to shareholders. Those companies are in the oil or sugary water business, not the rationally allocating capital business.
First, I'll state that I'm a Umm fan. But that doesn't mean we can't disagree on some things.
Circa 40% of XOM's investors are individuals. Many of them are retirees who invested in XOM stock over their long careers (and became multi-millionaires - the average career in XOM is around 30 years). The rest are individuals with a similar goal. That happens to be the top priority of XOM to shareholders - to deliver a safe and growing return over an extended period. They have now delivered an annual increase for over 40 years. Their shareholders enjoy a return competitive with, usually better, government bonds. Plus they enjoy the prospects of capital returns that bonds don't offer except in interest rate swings. There's a big chunk of people that want this kind of investment.
XOM management clearly spells out their investment priorities.
First is to continue to invest in projects that meet or exceed their hurdle rates - AND with a competitive advantage that permits them to ride through the cyclic nature of all economies. This is necessary because existing O&G fields steadily deplete. New projects are needed to offset this depletion. In turn, this permits the safe and growing dividend over long periods.
The next priority is a very strong balance sheet to, again, ride through the cycles and sustain the dividend.
The third priority is a competitive dividend with annual growth.
The final priority is stock buybacks when cash flow exceeds the above priorities, This can fluctuate over market cycles.
ExxonMobil is a counter-cyclic investor. Their projects usually have a life time measured in decades. They continue to invest when O&G prices are low because that's when attractive projects become available at attractive prices. They also sustain projects during these periods. That is a powerful incentive to service companies and other suppliers - and in turn offers good price contracts that cover an extended period forward. (I hear they even have gas turbines for new gas plants now.)
That strategy continued during the Covid crisis, and severely tested the no dividend cut policy. But they survived it. They took a lot of heat from Wall Street since others were cutting dividends and pausing capex. But XOM has outperformed their competitors since the crisis. Wall Street has acknowledged that their strategy was correct.
I was doing strategic planning when I retired 31 years ago. XOM was working hard to optimize this counter-cyclic strategy even then, and had done so for years. They've continued to optimize it for these three decades since.
Somehow I find all this a very rational capital allocation strategy for a certain segment of society. An anecdote. A good friend of mine was at Lee Raymond's retirement party. When they visited he told Raymond that his mother never asked him about the stock price, just the dividend. Lee told my friend that those are the people he thinks about every morning. Darren Woods, the current CEO, always talks about his responsibility to the individual shareholders. (Maybe somewhat like Buffett and his sister?)
There are certainly alternates. Berkshire under Buffett just waited out the cycles when prices got too high. They had a different group of shareholders who preferred the no-dividend, wait until you can buy low strategy. I'm one of them in addition to being an XOM shareholder. Rather that the 60/40 equities/bonds strategy recommended by many as you age, I let XOM substitute for the bonds.
Maybe this is just another example of my having outlived my time. Hell, I even still take a paper newspaper and refuse to let my life be dominated by a smart phone. It took a long time and lots of pressure for Buffett to cave in - maybe because it was free and he loves bridge?
Tex
