How ExxonMobil (XOM) Boosts its Own Stock Prices

Exxon
Photo: bear69designs' , Creative Commons, Flickr

How does ExxonMobil (XOM) do it? How does the company continue to boost its share prices?

According to BusinessWeek, by buying back its own stock. This is an interesting way to look at stock prices. Rather than investing in alternative energy, or even investing in oil wells that it considers only "marginally profitable," Exxon is all about the returns. Indeed, Exxon doesn't even believe in opening new refineries. Why? Because that would mean more money invested in something other than stock returns. Reports BusinessWeek:

With Exxon's stock handily beating the market and peers with a 15% annual return over the past decade, others in the oil patch are catching on to the strategy. "They don't need to grow production in order to generate shareholder returns," says energy consultant Richard Gordon.

To many, this does not seem particularly ethical. And, if ethical investing is important to you, Exxon's practices may seem wrong. After all, shouldn't companies be interested in helping the planet as well as making money? And the company is profitable anyway. Does it really need even more profits? While in the short term these practices (which Chevron — CVX — is beginning to eye as well) can cause a pain in the wallet for consumers, Computerworld blogs points out that Exxon's big oil business model may not hold out in the future. After all, with increasing energy demand worldwide, there is definitely going to be a need for alternative energy. Computerworld blogs reports:

Energy guru Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute, has consulted with oil companies for more than 30 years. "…there`s a big split down the middle of the industry now between those making smart investments and the rest," Lovins said during an interview with Charlie Rose last November. His summary of Exxon: "I`d say they`re the best in the industry in execution and probably the worst in strategy." Meaning, he says, that "they do inadvisable things very efficiently."

So, just because Exxon may be making money now, it doesn't necessarily follow that the company will continue to do well if it follows the same Big Oil model that has been followed for the past three decades. After all, with ExxonMobil buying back its own stock for the sake of driving up prices and making more profits, investors have more capital to spend. They can either sink it back into Exxon stock, or they can diversify to other companies that provide a more sustainable business model. Exxon may be a good short term investment, but for the long term, it might be worth looking into alternative energy, and finding companies that follow more ethical practices to invest in.

Disclosure: I do not own any energy or Big Oil stocks in my portfolio, or in the mutual funds that comprise my retirement account.

Site disclaimer.