2 Executive Summary: 2
3 Company Background: 2
3.1 Recent Sales and Net Income Trends: 2
3.2 Recent Earnings per Share and Dividends per Share Trends: 3
4 Equations and Variables Used: 4
4.1 Required Rate of Return (K): 4
4.2 Dividend Growth Rate (G): 5
4.3 Present Dividend Amount (Do): 7
4.4 Expected Dividend Amount (D1): 7
4.5 Stock Value (P0): 8
5 Model Requirements: 8
5.1 Dividends Per Share: 9
6 Stock Valuation Benchmark: 10
7 Stock Price Comparison: 10
8 References: 12
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