1 Executive Summary: The objective of this financial report on Exxon Mobil (XOM) is to compare the intrinsic value of the XOM stock (P0) and compare to the market price. The intrinsic value was calculated using Gordon’s model. The risk-free rate, rate of return on market portfolio and beta of the XOM stock was found using reputable financial sources that are sited throughout this report.
The investors’ required rate for the XOM stock was found by applying the CAPM method. Exxon Mobil was selected for this report because the company paid growing dividends over the last five years and the company is traded on the NYSE and NASDAQ. The following report provides a brief background on Exxon Mobil, an overview of the equations and sources used for the analysis, a summary of the models and methods used and a discussion on the findings.
2 Company Background: “Exxon Mobil Corporation was incorporated in the State of New Jersey in 1882. Divisions and affiliated companies of ExxonMobil operate or market products
in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products.” (Nasdaq, 2014) The company currently ranks second in the Fortune 500 directly behind Walmart and fifth in the Global 500, being outplaced by Oil and Gas industry competitors Royal Dutch Shell, Sinopec and China National Petroleum in the contest for the largest revenue in 2014.
The mission statement of ExxonMobil is: “ExxonMobil Corporation is committed to being the world's premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while simultaneously adhering to high ethical standards” (Exxon Mobil, Investors, 2014).
2.1 Recent Sales and Net Income Trends: Over the past five years, ExxonMobil’s sales and net income have recovered from the financial crises, but seen a decline in the two most recent years due to issues concerning the potential of fracking among others. Therefore the grow rates of sale are ranging from +27.22% (2010-2011) to -8.11% (2012-2013) with a mean of +10.21%. Concerning the net income of the corporation, the following chart shows a similar development, with net income ranging from +57.98% (2009-2010) to -27.41% (2012-2013) with a mean of +18.67%.
2.2 Recent Earnings per Share and Dividends per Share Trends: As shown in the graph below, ExxonMobil’s earnings per share have grown since 2009 with a deviation for the last year. Even though net earnings have declined for the last year, the annual total dividends have continuously increased and also increased for 2014. (Marketwatch, 2014) (Exxon Mobil, Investors, 2014)
3 Equations and Variables Used: This section first defines the values used to calculate the common stock value of Exxon Mobil and ends with the calculated value of the stock. The calculated stock value, (P0), is only $4.82 less than the current stock
price of Exxon Mobil, $94.48 on November 26, 2014.
3.1 Required Rate of Return (K): One variable needed to calculate stock value is (K) or the required rate of return. The required rate of return was calculated using the capitol asset pricing model (CAPM). CAPM is the linear relationship between the stocks required rate of return (K) and the risk (B) (Pawar, 2010). The equation used is as follows: K= RF + (Rm -Rf) B (Pawar, 2010)
Defined as follows: K is the required rate of return on a stock Rf is the risk free rate. In this case, it is based on the current 10 year U.S. Treasury bond rate. According to the U.S. Department of Treasury, as of Nov 24, 2014 the 10 year bond rate was 2.30% (Treasury.gov, 2014). Rm is the rate of return on a market portfolio. In this case, it was based on the S&P 500 index over the past year. That rate was 17.04 %. (Quicktake Morningstar, 2014) B is the stocks beta, which measures the co-movement between a stock and the market portfolio. This measure is also said to measure risk (Pawar, 2010). (K) The investors required rate of return is shown below for five different beta values:
In order to calculate a single required rate of return for Exxon Mobil, we will use an average beta value of .94.
The required rate of return using an average beta is shown below: K= Rf + (Rm -Rf) B K= 2.3 + (17.04 – 2.3)*.94 K= 16.16 %
3.2 Dividend Growth Rate (G): The dividend growth rate (G) was calculated using the following equation: G=BR (Pawar, 2010) Defined as follows: G is the dividend growth rate B is the retention rate
The retention rate was calculated by subtracting the dividend payout ratio (DPR) from one Dividend Payout Rate (DPR) measures the percentage of a company’s net income that is given to shareholders in the form of dividends (Investinganswers.com, 2014). The Dividend Payout Ratio is calculated with one of the two equations below:
Exxon Mobil earnings per share for the last four quarters:
DPR=2.7/7.95 DPR=.34 B=1-DPR B=1-.34= 66%
R is the return on equity (ROE). The ROE analysis starts on Dec 2011 until September 2014. Over this time period the ROE is showing a negative growth rate.
For our analysis, the average ROE shown below was used (ycharts.com, 2014)
Using the defined R and B we are able to calculate G G=BR B=.66 * .1934 = .1276 or 12.76%
3.3 Present Dividend Amount (Do): In adding the past four quarterly dividends, the present annualized dividend amount (Do) was calculated (Nasdaq, 2014)
3.4 Expected Dividend Amount (D1): The expected dividend amount (D1) was calculated using the following equation: D1=D0 (1+G) (Pawar, 2010) Defined as follows: D1 is the expected dividend amount for the next period Do is the present dividend amount G is the dividend growth rate
D1 is calculated below: D1=D0 (1+G) D1=2.7(1+12.76) D1= 3.04
3.5 Stock Value (P0): The stock’s value (P0) was calculated using the following equation, known as the Gordon Model: Po=D1/(K-G) (Pawar, 2010) Defined as follows: Po is the value of common stock today D1 is the per share dividend expected at the end of the year. This is shown in section 4.4. K is the required rate of return on a stock. This is shown in section 4.1. G is the dividend growth rate. This is shown in section 4.2. In using the Gordon Model, a range of stock values were calculated. All variables where held constant except for beta (B) and the required rate of return (K):
The beta value has a large effect on stock value as is shown above. The higher the beta the lower the stock’s value will be with the invers being true for the lower beta values. The different betas used to calculate (K) provide a range from 15.42 to 18.51. As such, when estimating the value of a stock, it is critical to obtain an accurate beta value for the analysis because of its effect on the calculated value. When using an average beta of .94, the calculated common stock value for Exxon Mobil is $89.66.
4 Model Requirements: Exxon Mobil has shown a steady positive growth in dividends for the past several years on NASDAQ. We gathered the last five annual financial statements of Exxon Mobil and performed the financial ratio analysis. Next, we determined the risk-free rate, rate of return on market portfolio, and the beta of the firm’s stock and averages for the last 5 years using reputable sources. Last we applied the CAPM to determine the investors’ required rate for the stock, and then used the financial statements to determine the dividend growth rate. Finally, we applied Gordon’s model to calculate the intrinsic value of the stock. 4.1 Dividends Per Share: In the table below are the prices per dividend for the past several years as listed on NASDAQ (Nasdaq, 2014).
Each year is listed showing the value each May for the past 6 years. For every year the price goes up a minimum of $0.02 per share and a maximum of $0.10 per share while never losing value from the previous year. The greatest value jump was from May 2011 to May 2012. A better representation of the collected data is displayed in the bar graph below.
The data from the table above is displayed in a simple bar graph where the increasing dividend price is reflected each year (Nasdaq, 2014). The increasing value is shown by the rising heights in the bar graph.
5 Stock Valuation Benchmark: Stock Price and Valuation (Data as of 11/25/2014) Trading Day Range $94.37 - $96.03 52 Week Range $86.91 - $104.76 50-Day Moving Average $94.45 200-Day Moving Average $98.28 Yield 2.85% Market Cap 401.3 billion Shares Outstanding 4,234.53 million Beta 1.09 Source: (Morningstar, 2014)
The current stock price in the table above provides a benchmark to compare against the calculated P0 value from section 4.1. Another stock valuation method is to find the book value, which is the difference between the value of the assets and liabilities shown on the firm’s balance sheet (Pawar, 2010).
BV = Book Value TA = Total Assets ($346.81 Billion) (Marketwatch, 2014) TL = Total Liabilities ($166.31 Billion) (Marketwatch, 2014)
The book value is much lower than the calculated P0 and the daily stock price noted in the table above. This is to be expected as there are two problems with using the book value. It relies heavily on historical balance sheet values (data from Exxon Mobil 2013 Balance sheet) and it does not consider future earnings (Pawar, 2010).
6 Stock Price Comparison: The table below compares the calculated P0 to the actual market prices over a 52 week span.
Actual Calculated P0 Delta Delta % 52 Week Low $86.91 $89.66 $2.75 3.16% 52 Week High $104.76 $89.66 $(15.10)
-14.41% (Morningstar, 2014)
There are a few potential reasons why the calculated value and the actual market prices are different. First, actual market prices fluctuate on a daily basis, as reflected in the 52 week market price. The calculated P0 values are dependent upon the dividend values which change on a quarterly basis. Also, investment trends can heavily impact the market price. If a third party financial advisor recommends a particular stock or industry this will affect the market stock price before the calculated stock price can be adjusted.
7 References: (2014). Retrieved from Morningstar: http://quotes.morningstar.com/stock/xom/s?t=XOM (2014). Retrieved from Nasdaq: http://www.nasdaq.com/symbol/xom (2014). Retrieved from Quicktake Morningstar: http://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX (2014). Retrieved from Treasury.gov: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield (2014). Retrieved from ycharts.com: http://ycharts.com/companies/XOM/return_on_equity (2014).
Retrieved from Investinganswers.com: http://www.investinganswers.com/financial-dictionary/ratio-analysis/dividend-payout-ratio-1234 (2014). Retrieved from Morningstar: http://quotes.morningstar.com/stock/xom/s?t=XOM (2014). Retrieved from Reuters.com: http://www.reuters.com/finance/stocks/overview?symbol=XOM.N E*TRADE. (2014). Retrieved from https://www.etrade.wallst.com/v1/stocks/snapshot/snapshot.asp?symbol=XOM Exxon Mobil, Investors. (2014). Retrieved from http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol-irhome Google Finance. (2014). Retrieved from https://www.google.com/finance?q=NYSE%3AXOM&ei=UFZ1VMKoMaSPigKVkYAY Marketwatch. (2014). Retrieved from http://www.marketwatch.com/investing/stock/XOM/financials/balance-sheet