Ever since I can remember, I've looked up to my father as a mentor, role model and a steadfast source of information for nearly everything worth knowing in this world. Being an engineer, successful business owner, proprietor of various patents and one of the smartest guys I know, there may be some truth when I rub it in your face with the childish adage "my dad is smarter than your dad!" By nearly most metrics, he truly is a brilliant guy.
That's why I was literally shocked about twelve months ago when I began asking him questions regarding investments while doing my best to pry information out of him in order to assist in preparing him for his retirement. He told me: "Well, yeah, I used to own stocks back during the tech boom days but I haven't done much stock investing since then. I'm mainly just sitting on cash at this point."
With my eyebrows pursed in shock and my mouth hanging wide open, my brain began immediately calculating the few remaining years we had in order to create a portfolio of dividend-paying stocks and bonds to assist for inevitable expenses in retirement.
Over the next few months, my father and I met regularly to talk about investments, companies he admired, various metrics of enviable dividend-paying companies and dividend yield and payout ratios. After talking it through and deciding to begin a solid path of regular contributions and dividend reinvestment, we began talking specific stocks.
After choosing a few necessary stalwarts, such as AT&T Inc. (T), Aflac, Inc. (AFL), Abbott Laboratories (ABT), Waste Management, Inc. (WM) and a slew of other recognizable solid stocks, we began constructing regular contribution intervals and automatic reinvestment plans to assist in what time we had left for compounding. Despite my best efforts, he still broke me down and added Apple Inc. (AAPL) and Costco Wholesale Corporation (COST) -- holdings I wouldn't necessarily recommend for soon-to-be retirees.
A few months rolled by and, despite having a fairly diversified portfolio with eleven or so holdings, I couldn't help but notice my father didn't hold any positions in oil and, this being an open negotiation, over a hot cup of coffee I asked him if he had any aversion to ExxonMobil.
By most measures, ExxonMobil (XOM) is an admirable company which needs no introduction and is, more or less, universally considered an amazing investment. However -- let's be honest -- the dividend yield leaves a retiree with a lot to be desired. I've often wondered how XOM, a company who commands the highest market capitalization with very few challenges to its status, manages to provide a paltry 2.2% dividend yield. I often ask myself why this yield isn't more attractive. For a company with $420 billion in annual sales, can't they reward the shareholders a little bit more? Come on guys, don't you know ConocoPhillips (COP) is yielding 3.7% and Chevron (CVX) is offering 3.1%? Even BP (BP) is dishing out 3.8% (and unless you were living under a rock, we all know what kind of trouble they were in over the recent past).
In truth, I know the answer lies in the fact share buybacks are a large part of XOM's strategy and the repurchasing of shares allows a company to provide investors with better means of capital appreciation. Which leads me to my question: Is XOM a good investment for retirees despite the extremely moderate dividend yield?
The rundown
With $420 billion in annual revenue and $11 billion in cash on hand, XOM is the 800 pound gorilla in the room. Though it's only sporting a 2.2% dividend, XOM's payout ratio is only 22% which means they surely can cover this dividend and could even raise it in the future if they chose to allocate their capital in this way. $17 billion in debt is highly manageable and with a current and forward P/E of just over 10 and a PEG ratio of 1.15, it's difficult to argue XOM is significantly overvalued at this point. Better yet, with a secure past of year-after-year dividend raises since 1982, it's unlikely the dividend is in danger by any means.
The bottom line
Sure, there is a list of oil companies out there which might produce superior dividend yields. You could even argue ExxonMobil's competitors will outperform while dishing out greater dividend payouts -- which may be entirely possible -- but I feel very comfortable adding XOM to my father's retirement portfolio even when taking the lower yield into consideration. It's rare to come across a company with such an enviable history, a strong economic moat and ability to generate astronomical profits with such consistency. Every investment inherently has risk, but choosing a well-run, moat-oriented, admired investment in XOM just seems as if we're diffusing much of the risk on some level.
Suffice it to say, I'll sleep very soundly tonight knowing the smartest guy I know has a plan to invest in one of the strongest companies I can name while securing plans to collect a portion of XOM's strong profits for decades to come.
Disclosure: I am long XOM, COP, BP, AFL, WM, ABT, AAPL.
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