Legendary investor Warren Buffett has often advised that it is better to buy an excellent company at a fair price rather than a fair company at an excellent price.
Investors have been presented with the opportunity to buy an excellent company at an excellent price in ExxonMobil (NYSE: XOM). Shares of the world’s biggest oil giant are down in the last week, month, quarter, six months and year. You could have bought ExxonMobil recently at a share price lower than “The Oracle of Omaha” did when he loaded up on $3.45 billion worth of XOM last November.
For long-term investors, there are three compelling reasons to buy ExxonMobil stock.
From a contrarian view, the energy sector is presently in disfavor. The price of oil is at a five-year low. As a result, stocks in the group have plunged. Shares of companies that have spun off divisions to be pure oil plays have been hit especially hard.
ExxonMobil did not go this route. It has not fallen as far as others such as ConocoPhillips (NYSE: COP), which has plunged more than 13% this quarter. Over that time period, ExxonMobil is off by around 4.8 percent.
The growth projections for ExxonMobil are bullish, even with the price of oil falling.
Due to its sheer size, among the largest publicly traded companies in the world, ExxonMobil will not be delivering huge growth numbers. Over the next five years, earnings-per-share growth is projected to be just over 4%.
When you consider that Exxon’s EPS growth fell by 3.2% in the last decade, the 4% growth projection is a bullish trend expected for ExxonMobil.
In addition, investors are paid very well to own shares of ExxonMobil for the long term.
It is a “Dividend Aristocrat.” To earn that title, a company must have increased its dividend annually for at least 25 straight years. ExxonMobil’s five-year dividend growth rate is 10%. The industry average is just 0.5%.
With a dividend payout ratio of just 33%, ExxonMobil should easily be able to keep increasing its dividend annually. So XOM shareholders should continue getting an annual raise for simply not selling the stock. At present, the dividend yield for ExxonMobil is 2.9%. For the average member of the Standard & Poor’s 500 Index (NYSE: SPY), the dividend yield is around 1.9%.
ExxonMobil’s growth and income features are supported by a solid balance sheet and robust earnings statement.
There is little debt, even though the company could borrow very cheaply. That is another hallmark of a Buffett stock. He sees very little need for taking on debt with the belief that the well-run operations of a sound company will generate sufficient capital for all of its needs.
That certainly explains the long-term debt-to-equity ratio of ExxonMobil being a microscopic 0.06.
Betting against Warren Buffett is never a good idea to begin with. But buying a blue chip such as ExxonMobil when it is trading below what Buffett paid is almost certainly a way to prosper.
The cost of oil should rise again, as it has in the past. When it does, so will ExxonMobil stock.
*Jonathan Yates does not own any of the stocks mentioned in this article.
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