Nobody ever waxed rich owning an electric utility. You wanna own them only when their cash yield is competitive with Treasuries, secure, likely to ratchet up 3% or 4% per annum. Then, fall back to sleep. Consolation is good relative performance in a bear market, but nowhere can you bank relatives.
Another kind of custodial operator walks and talks like Apple or Facebook. He wants to look proactive, but his executive floor remains dead quiet. The suits talk about “your” company in their annual report, but it’s really “their” company. They do ratchet up cash dividends, but share buybacks, which I consider pro-management, turn excessive. Corporate proxy statements run 60 to 80 pages. Designed to be boring, even unreadable, but they do divulge all of management incentives in cash and stock.
Boeing is a good example. On page 38 of its proxy report you find years of overly indulgent headman compensation spelled out. Dennis Muilenburg’s package last year totted up to $23.4 million on a salary base of $1.7 million. Over three years, his take was some $57 million. Serious money. Following on, CFO Gregory Smith took home $32 million. Did the apparent press to certify the 737 MAX have any connection with prospective largesse? Maybe. Outside directors must step into such snafu situations. You can’t remain collegial. For shareholders, there should be a three-year giveback of incentives. Today In: Money
Boeing as a stock gave back past 24 months’ upside. Pre-crashes, it ticked at $450. As a shareholder then I hypothesized a $500 price tag, but after the news Boeing bottomed at $300. When your company’s stock drops from $450 to $350 there’s no case for more than salary, and tenure should become an issue on the boardroom table.
There’s a more insidious kind of corporate behavior where management talks like a big brother to shareholders in their annuals, even fatherly. It’s always “your” company, not their company, but it ain’t so. Management does raise cash dividends a few pennies per annum. But, share buybacks enhance the long-term value of management’s option account, non-taxable until exercised. (Let’s change this construct.)
Exxon Mobil, a major market capitalization over the decades, is a great example of how to look cosmetically proper, even adventuresome, in capital spending which runs very hard to replace known oil reserves.
Not distinctly overleveraged like Occidental Petroleum, where after its fall yields 6.7%, a payout ratio that looks unsustainable. Nobody can call Exxon Mobil a ragamuffin, but its five-year price chart is abysmal, from near par down to low seventies.
Over this term, management went through all the motions of proactivity. But, net income this year is running 35% below 2018 and they won’t come close to covering their first-half payment of $1.69 a share, up from $1.59 a year ago. Downstream results and chemicals collapsed here and abroad. Crude oil production earnings actually held up but carry only 60% of total profitability.
Capital spending runs at $30 billion which works out to full utilization of cash flows. Average earnings for Exxon over five years through 2019 work out to around $4 a share. So, the stock sells at 18 times average earnings comparable with the market’s P/E ratio on forward 12 months’ earnings. There is, after all, a certain symmetry to corporate valuation, historically speaking.
The issue is why own any custodial paper except for a cyclical bounce not anticipated by the market. The current yield on Exxon is 4.6%, more than competitive with the market, long-term Treasuries and even AAA debentures, but so what? In a slow growth setting, petrochemicals and gasoline price leverage is absent, normally 40% of Exxon’s operating earnings.
There’re bigger issues. Why pay up for any industrial-based property in a world where economic growth is hard to conjure up? Look elsewhere for earnings leverage and secular growth. I consider Exxon Mobil the class act among big capitalization industrials and energy plays. It goes through all the motions of a serious, long-term player in its field with a balance sheet that is comfortable and even now easily bears the strains of cyclical variance.
In 2001, Exxon Mobil was number three in the S&P 500 Index with a market capitalization of $281 billion. By 2014, still number three, its market cap pushed $400 billion, right behind Microsoft. Today Microsoft is a $1 trillion property, numero uno. Exxon is in 12th place, market cap of $297 billion.
Soooo… since 2001, Exxon Mobil management has run very hard and methodically, staying within its operating cash flow construct – but got nowhere. Yes. They’ve size, but what else? Early sixties, Tom Watson in an aside told me IBM had bet the company on development of the 360 Computer. (They won.) To refresh myself, I turned to Facebook’s quarterly earnings report. Facebook doesn’t date back to John D. Rockefeller or IBM. Birthed in a dorm room a generation ago.
Consider, Facebook’s market capitalization runs around $540 billion. The R&D run rate is 20% of revenues, a gutsy, unheard of ratio even among tech houses. Operating cash flow should exceed $35 billion. Call it a 15 times multiplier. On operating cash flow, my defining metric for an internet house, Facebook is much cheaper than Exxon, even the entire S&P 500 Index.
The case is clear cut. Large-cap industrials and oilfield operators’ records run spotty. Investment entry points are critical. Peak of cycle, they’re poisonous and do drop a snappy 40%. Let the other guy own polite paper. Facebook and its maximum leader, Zuck, draw the worst press I’ve ever seen for a top 10 property. But their R&D spend rests far above Apple’s.
Journalists don’t define market valuation or a company’s fundamentals. Neither do most of us who hold CFAs and manage tons of capital. From its low, AT&T advanced almost 50% latest 12 months. So goes Facebook. Strange bedfellows with the common denominator of a Stupidsville consensus and a bad press.
Exxon Mobil proudly declaims in its quarterly that it raised cash dividends 6%, making it 37 years of consistent largesse. But, at current earnings power its payout is 100%. Not even utilities dare risk more than two-thirds of earnings payouts. Focus on the operating cash flow metric for it’s the wherewithal to grow earnings and stock prices.
Five-year charts for prime industrials like Honeywell, 3M, United Technologies, DuPont, Dow Chemical and Deere, show I shouldn’t just beat up on Exxon Mobil. Nobody had on glad-rags excepting Honeywell and Deere who benefited from international revenue growth. Materials stocks like U.S. Steel and Alcoa sustained near total wipeouts. You had to define railroads as internal efficiency stories, like Union Pacific and CSX to latch onto them.
Nasdaq doubled over five years while Dow Industrials rose 70%. My read is slowing GDP momentum is a worldwide predicament. Growth should outperform value paper which is no longer even reasonably priced. Railroads sell at 20 times earnings, almost like growth stocks.