I usually steer clear of referencing Warren Buffett. It’s nothing personal. It’s just that he’s the topic of so many articles, op-eds, commentaries, missives, rants, exposés, and on and on. I have nothing to add (just like so many of those who actually write on Buffett have nothing to add).
That said, Buffett’s recent sale of ExxonMobil (NYSE: XOM) piqued my interest. It piqued it because the sale seems so out of character.
ExxonMobil was added to Berkshire Hathaway’s (NYSE. BRK.a) investment portfolio in the third quarter of 2013. Berkshire paid $3.74 billion for 41.1 million ExxonMobil shares – a significant amount for a significant number of shares. All of ExxonMobil was subsequently sold in the fourth quarter of 2014. This points to a holding period of little more than a year. Isn’t Buffett known for the “forever” holding period? (The answer is “yes.”)
I’ve yet to read a direct quote attributed to Buffett on reasons for the ExxonMobil sale. Professional commentators hate silence, so they resort to mind-reading. Most arrive at the same conclusion. The obvious, and therefore lazy and most-repeated, explanation is that ExxonMobil was sold because of falling oil prices. Perhaps, but others reasons – ones we are not privy to – are also likely. If falling oil prices were the primary reason, why then up your stake in Suncor Energy (NYSE: SU), which Buffett did?
The sale is even more baffling considering ExxonMobil was hardly a lost cause. Berkshire is estimated to have booked at least a $100 million profit on its sale. Over its holding period, Berkshire also likely collected at least as much in dividends.
I don’t know Buffett’s reasons for selling ExxonMobil, nor will I pretend to. Not that it matters, because what Buffett does many investors do regardless of the reason. When news of Berkshire’s ExxonMobil sale hit the wires, ExxonMobil shares dropped nearly 2.5%.
So is Berkshire’s sale a signal that investors should sell or avoid ExxonMobil? It all depends if an investor is comfortable thinking for himself or herself.
Conservative income investors comfortable thinking for themselves will find a lot to like. ExxonMobil is among the bluest of blue-chip dividend growers. The dividend has been faithfully increased each year since the end of World War II. During that time, there were only a couple of two-year periods where the dividend was held steady. There were no reductions.
But won’t today’s $50/barrel oil change ExxonMobil’s outlook? There is no shortage of pundits and professional prognosticators publicly cursing the supposed scourge of low oil prices.
Pay them no mind. Today is nothing new. The world was awash in cheap crude in the 1990s. For most of the decade, West Texas Intermediate Crude traded between $20 and $40 a barrel. Despite the gully wash of oil, ExxonMobil thrived and continued to hike its dividend annually. Indeed, ExxonMobil’s annual dividend began the 1990s at $1.23 a share and left them at $1.67 a share (split adjusted).
What’s more, ExxonMobil began the 1990s as Exxon. In late 1998, when WTIC was priced below $20/barrel, Exxon acquire rival Mobil on the cheap, thus it left the cheap-oil decade as ExxonMobil, having picked up its rival on the cheap.
The Buffett-induced selloff has lifted ExxonMobil’s yield above 3%. The yield is a reasonable yield to consider a new position in ExxonMobil. I say that because the yield will rise over time. ExxonMobil has decades of dividend growth behind it. It has decades of dividend growth ahead of it. I would bet $536-million-worth of Solyndra government-guaranteed loans that’s so.
In 1971, you could have bought a share of ExxonMobil for $2.30 (split-adjusted). Since then, ExxonMobil shares have appreciated 9% annually, on average. Today, ExxonMobil shares trade around $90. The dividend rises and investors bid up the share price.
Of course, the dividend itself generates its own return. ExxonMobil pays a $2.76 annual per-share dividend. In other words, the investor who bought ExxonMobil in 1971 receives his purchase price and more back in dividends each year. On dividends alone, his annual return exceeds 100%.
Buffett might have plenty of reasons to sell ExxonMobil, but income investors have plenty of reasons to buy ExxonMobil.
Saudi Arabia’s Plot Backfires!
When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.