Recent Buy

buyAhh, the first purchase of the month. Always an exciting time. I don’t know about you, but I really love taking a hefty chunk of capital and putting it to work with a high quality company. Some people prefer putting money to work on new clothes or a fancy trip. The former builds my passive income stream thereby slowly buying myself freedom while the latter guarantees me continuous servitude as mounting bills require more work to pay for. I guess you could say I’m a simple guy with simple needs, but I’d say wanting complete freedom is actually quite ambitious.

I could have chosen to hold on to my capital a little longer as the ongoing government shutdown continues to bring the broader market down, and with it many high quality stocks. However, I always choose to ignore the noise and buy fundamental strength on transient weakness. Having a vision for the long-term is required when investing in equities and my sense of sight has never been stronger.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 20 shares of Exxon Mobil Corporation (XOM) on 10/7/13 for $86.00 per share.

XOM needs no introduction, but just in case you’ve been living under a rock it’s the largest publicly traded integrated oil and gas company in the world. They are involved in the exploration and production of crude oil and natural gas, manufacture of petroleum products and transportation as well as sale of crude oil, natural gas and petroleum products.

Exxon Mobil is attractive on many different fronts. Their scale allows them to leverage their massive size into projects that are too capital intensive for smaller firms. This is a company that had just over $482 billion in revenue for 2012. Earnings came out to $44.9 billion last year. These are just huge numbers. Revenue has a compound annual growth rate of 7.73% from 2003-2012, while EPS has a CAGR of 13.31% during this time period.

Being fully integrated also allows them to leverage exploration when oil prices are advantageous and conversely focus on downstream operations when oil prices soften. This diversification is something that has helped a company operating in an otherwise cyclical industry to retain such a long dividend growth streak.

Not only is this company humongous in scale, but they’re great at operating at a high level. They take safety extremely seriously, falling well below their benchmark in terms of incident rates. They blow away competitors in terms of return on capital employed. They were able to achieve a replacement reserves rate of 115% throughout 2012. They’ll likely continue posting great numbers going forward with 31 major project start-ups between 2012 and 2017. Continuous reinvestment back into the business ensures XOM has a great chance at remaining highly profitable for the foreseeable future.

Exxon Mobil isn’t just reinvesting capital back into the business; XOM is one of the best companies in the world at returning value to shareholders. Since 2000, the company has reduced the shares outstanding by 35%. The company spent $20 billion on share buybacks during 2012. In addition, they have 31 consecutive years of dividend growth under their belt. The 10-year dividend growth rate stands at 9%, but it appears the company is increasing this pace with the most recent raise being 10.5%.

Obviously, as with my recent investment in BP plc (BP), an investment in an oil major is attractive as a play on the increasing consumption of energy worldwide. The global population continues to increase and as real incomes rise we’ll continue to see new consumers able to use their newfound purchasing power to buy bigger homes, cars and other middle class luxuries, all of which require more energy to sustain.

The entry yield on my purchase price is 2.93%, which is rather high for XOM historically speaking. The company continues to have a low payout ratio at just over 31%, which allows them to raise the dividend in the high single digits easily while still keeping a low payout ratio due to earnings historically rising faster than the dividend has been growing.

XOM appears to be trading below fair value here. Shares are currently spotting a 10.7 P/E ratio, which is just a bit under its 5-year average of 11.1. I valued the shares using a Dividend Discount Model analysis using a 10% discount rate and a 7% long-term growth rate, which gives me a fair value of $90. I’m always interested in buying an ownership position in a world-class enterprise at a price below what I should probably be paying. Of course, the bigger the spread the better. All in all, I’m happy with my purchase of XOM shares. I’ve gained a piece of a global energy leader that operates at a very high level while also being one of the most prodigious returners of capital to shareholders.

This purchase will add $50.40 to my annual dividend income based on the current payout.

This is the 42nd position in my portfolio, as this was a new investment.

Some current analyst opinions on my recent purchase:

*Morningstar rates XOM as a 4/5 star valuation with a fair value estimate of $97.00.
*S&P Capital IQ rates XOM as a 4/5 star Buy with a fair value calculation of $91.20.

I’ll update my Freedom Fund in early November to reflect my recent addition.

Full Disclosure: Long BP, XOM

How about you? Buying XOM at today’s prices? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Comments

  1. Anonymous says

    Nice purchase. I grabbed 25 shares @ $87.44 recently, but I’m considering adding to the position in a rollover IRA, especially if it dips a little more. The value is exceptional, and even if it drops from the purchase price, it’ll come back and the dividend will always be there.

    I have two interesting picks on my radar, including MAIN and PSEC. High yields, but they also appear to have strong metrics to back the dividend, including low P/E numbers. Any thoughts on these?

    • says

      Anonymous,

      Great stuff! Glad to see we’re on the same page with XOM. I’d be interested in adding more if it drops from here, but the drop would probably have to be fairly significant as I’m already now fairly heavy on energy.

      Per your question I’m not a big fan of the BDCs. I believe that it’s just about impossible to really know what you’re investing in. The risk/reward profile is amplified with these compared to the more conservative investments I usually choose, and speaking ironically from someone who is almost 100% invested in equities I typically skew conservative. I may change my opinion on these, but as I see it there is just too much uncertainty.

      Best regards!

  2. says

    Great pick up. I got it a few weeks ago. I recently purchased CVX since it had a nice dip.

    My next pick may be TGT if i can find some capital.

    Good luck!!

    • says

      FFDividend,

      Great buy on CVX! I love Chevron at today’s prices, but my allocation is already about as large as I’d like it to be.

      I like the TGT idea. I’m looking at that one and WMT for a potential purchase this month. We’ll see.

      Cheers!

  3. says

    I like the buy. I noticed today a lot more companies that are priced better. I like XOM, CVX, WMT and TGT at current prices. And there’s several more that are getting close. Ill probably be holding off on purchases until around the 20th but I’m liking what I see a lot more.

    • says

      Pursuit,

      Great options there. I like them all. I’m strongly considering adding to my WMT position here, but TGT also looks very nice. KO jumped above 3% and MCD has been weak lately. There’s definitely some options right now. :)

      Best regards.

  4. Spoonman says

    Good choice! XOM is as solid as they come, it’s one of my portfolio’s core stocks. XOM is one of those companies that you can be damn sure is not going away any time soon. You can rest well, your money is in a good place!

    • Spoonman says

      By the way, I just learned that you will not be joining Kraig in the podcast going forward. I’m just glad that I got the chance to hear your voice and your enthusiasm. Your passion for reaching FI and DG investing is amazing, I find it very energizing. I hope you make it back to the show in the future if only to give a status report or just make a guest appearance.

      Cheers!

    • says

      Spoonman,

      I’m sorry about discontinuing my role in the podcast. I really wanted to do it, as it was a project that aligns well with what I believe in and the message I’m trying to get across. However, I just don’t have the time necessary to commit to it. That was a concern before we even began and I did my best to work around it, but in the end I was just overwhelmed. I’m going to talk a little about that very soon.

      Thanks for the continued support. Hopefully this blog can continue to evolve and improve. I’m really excited to keep writing and inspiring.

      Best wishes!

    • says

      DM,
      Wanted to take this opportunity to truly thank you for the inspiration you provide here every single day. You have to do what is best for your health, and sad to hear you will not be doing the podcast anymore but totally thankful that you continue to blog here on Dividend Mantra. I gain inspiration from you blog every single day.
      Sincerely,
      Ian

    • says

      Ian,

      Thanks for the incredibly kind words. Your support is most appreciated!

      I’m sad about the podcast as well. The feedback was mixed, but there were many (like you) that were very positive and supportive. It’s unfortunate, but I found the time consumption necessary for the podcast more than I can give right now.

      I’m super excited about writing and bringing new content to the table, which might not have been as easy while simultaneously podcasting.

      Thanks again for everything!

      Best regards.

    • says

      Steve,

      Nice. I like the KMI buy. I would have added as well if I wasn’t already so heavy on that company.

      LEG is interesting. I remember looking at them around $22/share (or somewhere around there). I was concerned by the slow dividend growth, but the shares took off! I may have to take another look.

      Thanks for stopping by!

      Take care.

  5. says

    I will probably also buy XOM very soon. Last month I bought Gazprom. What’s your opinion on them? I guess they don’t have the dividend history you would like but their P/E is just crazy.

    BR,
    Frihetsfonden

    • says

      Frihetsfonden,

      Gazprom is very interesting, but for me there is just too much geopolitical risk. I’m already fairly well diversified in energy as it stands, so Gazprom doesn’t really make sense for me. However, I hope it works out fantastically for you. :)

      Cheers!

  6. Anonymous says

    Hi Jason. A bit outside this topic, I wanted to ask if you’ve considered buying Leggett & Platt (LEG)? It’s a divident aristocrat, and with a recent price drop you can get a fair yield with an ok P/E of 15 or something. Any particular reason why you’ve stayed outside so far?

    Best, Toni/Finland

    • says

      Toni,

      LEG was mentioned by Steve earlier. I was actually quite interested a while back around $22/share, but passed because I was deterred by the slow dividend growth. That may have been a mistake, because they’ve been humming very nicely since then. The P/E ratio is reasonable and the yield is attractive. I’m not sure how the future growth looks with this company, however. I imagine a moat exists due to manufacturing scale and distribution, so that could be a positive. I’d imagine the furniture/fixtures/furnishings industry is highly fragmented, no?

      Thanks for dropping by and sharing the idea. :)

      Best wishes.

  7. says

    Nice choice. I’m thinking of picking up XOM as well. I’m waiting until an agreement is made on the debt ceiling first, I doubt they would let the US default, but I prefer not to weather the panic leading up to octover 17th

    • says

      Kevin,

      It’s tough to say what’s going to happen. Anything is possible in Washington right now. I could have waited, but when I sat down and thought about it I currently have north of $130k already invested. This XOM investment was a little more than $1,700. Which pool of capital has a greater chance (in absolute amounts) of negative consequences from political events? Obviously, the former. I’m not going to suddenly divest everything because of political games, so why then wouldn’t I continue to invest?

      Just some things that run through my mind. :)

      Best regards!

  8. Anonymous says

    I can’t believe IBM is lower than what I bought it a few months. Thinking of purchasing more! Also bought coke yesterday in a big chunk. There are definitely some (few) bargains out there! This is more of a sale. Looking for a clearance specials.

    • says

      Anonymous,

      IBM is looking very attractive here. I already like my tech exposure, but I might not mind selling off the rest of my INTC holdings and reinvesting that into IBM. That would keep the weighting the same and possibly increase the overall quality of my portfolio. It’s something I’m thinking about.

      KO also doesn’t look too bad. I wasn’t a fan at $40, but it’s since fallen 10%. It’s crossed the 3% yield mark, which is something that doesn’t happen too often. I may increase my position slightly here. I don’t think it’s a steal, but KO rarely is.

      Let’s hope we see continued sales. :)

      Take care.

  9. Anonymous says

    Du you consider the sector-distribution in your portfolio before you hit that buy-button?

    In what sector would you like to increase your weight in?

    My dividend growth machine is distributed as:
    Financials (Many REITs etc.) 22,2%
    Consumer Staples 18,7%
    Consumer Discretionary 17.3%
    Information technology 9,4%
    Energy 7,9%
    Industrials 5.9%
    Utilities 5,4%
    Health Care 4.8%
    Telecommunication Services 4,6%
    Materials 3,7%

    Where would you (and if other readers here like to comment) like to be stronger if you where me? How does your own distribution look like?

    Best Regards
    Per, Sweden

    • says

      Anonymous,

      I consider sector allocation, but it’s not my primary concern when investing. I don’t have exact portfolio targets, because I think that would be overdone. However, I do have general ideas on where I want to be and my portfolio is always changing and morphing with new capital. That being said, I prefer consumer discretionary/staples, energy, healthcare and industrials over the rest.

      I personally would not feel comfortable with a 22% allocation to financials. That’s just me. That is probably the riskiest sector of all, so being a fairly conservative investor I shy away from that a bit. That being said, I’m probably a bit heavier than I’d like to be right now there.

      I lump utilities and telcoms all in one because they operate very similarly. They typically have large infrastructure (and debt) and provide a ubiquitous product/service. Just the same as you can’t do without electricity, it’s almost impossible to get by without a telephone. I wouldn’t want to be more than 10% here long-term. That’s the same as where you’re at. I’d be comfortable with a bit less than this, but the higher yields are tough to pass up for current income.

      I’d weight energy higher than you do, along with healthcare. I’d put industrals somewhere around 10%.

      Maybe-

      Financials – 10%
      Consumer Staples – 15%
      Consumer Discretionary – 15%
      Information Technology – 5%
      Energy – 15%
      Industrials – 10%
      Utilities – 5%
      Healthcare – 15%
      Telcoms – 5%
      Materials – 5%

      That’s just off the top of my head. Again, I don’t try to lock these down into perfect allocations. I tend to look at my portfolio as this evolving, organic machine. The weights change all the time, but as long as I don’t go too crazy in one sector I’m not particularly enamored with (namely tech and utilities) or become too out of whack (a 30%+ weighting to any one sector) I think I’ll be okay.

      I hope that helps!

      Best wishes.

  10. says

    Very nice buy DM. A discounted cash flow model gives me an intrinsic value of 138.– which gives you a margin of safety of 50 around. I am still waiting some more time before any new dividend growth buy. Take care.

    • says

      Aspenhawk,

      Awesome! Thanks for the information there. I like your margin of safety. Makes me look really smart. :)

      Hopefully the market brings you some great value when you’re ready to pull the trigger.

      Take care.

    • says

      Captain,

      You’re right. I think I have most of them under the umbrella now. The Freedom Fund is eating it up! :)

      I agree. XOM looks pretty good here. I feel confident about my purchase. If it drops significantly (around $80) and I have the capital I’ll be glad to buy more!

      Best wishes.

  11. says

    Excellent overview Jason! This just confirms the purchase I made a while back. I also picked up CVX and wish I had money left over for BP! I hate being low on powder when opportunities are happening!

    • says

      Shop Teacher,

      Glad you liked the post. :)

      I hear you. It’s tough to see some sales and not have enough capital to take advantage. I’d say we’re starting to see more attractive prices, however nothing is particularly compelling right now. I’d say XOM represents a reasonable value for a very high quality company.

      BP is one of the few “screaming” deals I see. I made a big investment in that company, so I hope it serves me well.

      Good luck out there!

      Best regards.

  12. Anonymous says

    Nice purchase, and I’ve been checking daily to see if you were going to press the BUY button with this “fire sale.” I’m jones-ing to buy 50 shares of CVX and PM each to round out my positions. Alas, I only have enough for one of those purchases currently. What to do, what to do… (Dividend New England Lass)

    • says

      Dividend New England Lass,

      I think CVX and PM both represent some reasonable value here. I probably would have bought CVX myself here if I didn’t already own 40 shares (and 0 of XOM prior to this buy). PM also looks great. It’s already my biggest position and I’m trying to build the rest of the portfolio around it so as to catch up to it. I still have a ways to go for that.

      Best of luck with your decision! I think either one (and both) will serve you well over the long-term!

      Take care.

  13. says

    I like to be waiting for even better price. So this shutdown is a great opportunity for me and I was waiting and still will be waiting as long as I see signs of improvement. Until then I continue saving cash. However, I think the market is currently at its bottom (relatively). We may see a bounce from here. The question would be how strong the bounce will be. Will it push the market higher and resume the trend? Nobody knows. It may just bounce and then fail and continue lower. Who knows.

    • says

      Martin,

      It’s impossible to say where the market is going from here. I choose to only worry about what I can control, otherwise I’d go nuts trying to time the market bounces. :)

      However, I certainly hope you’re right in regards to a better opportunity being on the horizon. I’ll be most grateful to see that.

      Cheers!

  14. says

    Nice buy Jason. I was however wondering why you did not pick CVX instead of XOM. Its valuation seems even more attractive than XOM and in my opinion have better growth prospects than XOM. Although the difference between these two will be minimal in the long run.

    On a separate note, what do you think about CSCO?

    -Jaspinder

    • says

      Jaspinder,

      CVX is also a very fine pick right now. I chose XOM instead only because I already have 40 shares and I had 0 shares of XOM (before this purchase). Diversification interests me even within the same sector because different companies offer different geographical exposure and opportunities therein.

      I like CSCO. I actually started looking at the company when it was $20/share, and within a couple days or so it popped up to $24/share. It was a crazy pop after an earnings call. I have since cooled my interest, but it does seem to be a pretty conservative play in the tech space. I’ve been divesting my INTC holdings and will likely sell the rest early next year unless the company improves the fundamental markedly. In that case, IBM is on my short list but CSCO could be there as well. I might also take a look at QCOM.

      Best wishes!

  15. Anonymous says

    Hi Jason,

    I know this is not a SWAN value-investing dividend growth stock but I couldn’t pass. ARIAD Pharmaceuticals! Talk about cheapo.

    • says

      Anonymous,

      Boy, that’s a high-risk play. I wish you the best with it. I’m not a big fan of pharmaceutical companies in general, and I would be even more leery of a small company that is experiencing significant issues. I hope it works out for you. :)

      Take care.

    • says

      Trader,

      Ha! I can only wish this blog had that kind of clout. I’d be thrilled to just meet Warren one day. He’s a big idol of mine, as he is for many.

      Glad to see that there is some validation behind my purchase, however, as the purchases were around the same time for the same price.

      Best wishes.

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