(101 for anyone who doesn't know this: revenue is how much you sell, profit is what's left over for shareholders, market cap is how much shareholders think that profit stream is worth).
Relevant: check out wikipedia's rankings of company size:
This is a reasonable thing to point out. When valuing equities, i tend to use a strategy out of the playbook of a less famous fund manager, John Neff. That is, one that includes total return.
Indicator: Neff Ratio = (EPS growth rate + dividend yield)/PE
This is similar to the inverse of PEG, a much more common indicator, but it includes yield as part of total return. It's one of my primary screens when looking for equities, because both Exxon and Google would have good marks, even though their return would be from different sources.
One Question remaining is when Google's market value will surpass Apple's. That'll likely happen before the end of this year, so get ready for the repetition of the same HN discussion, replacing Apple with Exon.
The difference in my mind is that Exxon is making money from natural resources that are not renewable and the cost for extracting oil is on the rise. If they don't reinvent themselves, they'll die. Google on the other hand is making money out of software. Software is the artifact of our own mind. So the way I see it - for companies such as Google or Apple, the sky is the limit. For Exxon, unless they reinvent themselves, there's nowhere they can go.
And btw, isn't it awesome that software/hardware companies are starting to dominate the Top 10?
Google needs to reinvent itself too, perhaps even more & faster than XOM. The industry moves too fast for them to sit still for more than a couple years, while XOM has got decades to figure things out.
Hm, applying a bit of my personal sense, I'd say Exxon's business is drying up in the foreseeable future (oil is running out, renewable energy is on the rise).
Google is a software business with very strong network effects.
I definitely see how there is more demand for software in 100 years than for oil (as a fuel).
Economics is not a pure numbers game. They [edit: the numbers] just try abstract what the companies do now and in the future.
Exxon Mobil isn't going anywhere. As oil-usage decreases (which is still likely a long ways off), I'm sure they'll be right there to provide whatever the next energy source is.
Actually worldwide oil usage peaked in 2005 and has been gyrating around that level ever since. About half the months since then have seen decreases and half increases, so it's not a long way off. It's almost a decade ago.
Eventually heroic measures will start to fail and usage will be dropping every month for the next century as the oil fields slowly dry up.
But it's not just that EREOI in Saudi Arabian oil is projected to be at most 10 currently (down from > 30). While that's not that serious, it is decreasing exponentially and a value of < 5 would be catastrophic. Most other projects are far worse off.
(Why ? At EREOI of 10 you have to "waste" 11% of oil, up from 4% at 30. However at 5, the factor becomes 25%, at 4 it's 33%, at 3 it's 51%, at 2 it's 100%), note that current total reseve oil output is 2% at best, and minimum depletion rates are 7%.
Here's the net problem : the world will run out of oil in 6 months - 12 months. The US has a stay of execution though, but not for long : 2-3 years at most, and the US will need to implement protectionist measures to keep oil at a reasonable rate. Given what happened every other time we have a few percent drop in oil availability, I'm expecting a total stock crash and a new crisis by the end of the year.
Exxon is here to stay. This is a company that has seen 19 American presidents come and go. No other company in the world invests as much in energy R&D.
I believe one reason why Google and even Apple are able to surpass Exxon is because Exxon pays out a large portion of its profit in dividends while Google and Apple retain much of theirs in bank accounts as assets. If Exxon didn't pay a dividend they'd easily be the largest company in the world with regards to market cap.
The reverse is a probable case. If Exxon didn't deliver dividends and investors don't believe the company will grow, then they'd pay even less for shares. A large part of a mature's company's worth is tied to interest rates. People pile into a dividend payer because it's better than holding cash - heck they borrow cash to buy the dividend payer. So actually Exxon could be just as vulnerable to a share price fall as Apple.
Lastly, what happens if Exxon holds cash and grows a stockpile? If it's not earning money, the cash just makes a share more expensive, but the dividend as a percentage decreased. Well, the closer that percentage gets to interest rates, the less attractive the stock gets to those type of investors.
I'm not sure that is a correct line of logic. Often, companies pump their stock prices by handing over dividends. That's a sign of a mature company, which can't expect to grow much, but is still valuable to its shareholders if it can provide results in any other way.
No, if the company pays out dividends, its price ought to fall. For example if a stock is at $100, and then pays out $5 in dividends, afterward the price will be $95. The company is worth less after giving away a pile of its cash.
Thee is a certain logic there, but it's not reall the logic that drives stock prices. While it's true that the "backing" of a stock is a claim on the assets of the company in the event of dissolution, from which one could infer that distributing assets reduces the value of stock, the reality is that stock purchases are not based on valuation of the company—despite the fact that he whole idea of a market cap presumes they are—but on the expected value realized from the stock stock, which is driven by two things (1) expected payouts while holding the stock, i.e., dividends, and (2) expectations that someone else will be willing to pay more in the future for the stock (largely driven by perception that future growth or potential buyouts are not fully priced into the current market price.)
Establishing a practice of paying dividends feeds into #1 to increase the perceived value of holding the stock.
It falls on the next day, but over time paying out dividends makes certain kinds of company stock more attractive.
Let's run an asymptotic example and say a company has $1000 in cash and $1 per share in profits. Since most of the company is cash you can't buy shares cheaper than $1000. But you might pay say 10x profit and thus the stock price is $1010.
If the company had paid out excess cash all along, the stock price would be $10 at 10x profit, and so every $10 you invest would give you a 10% return versus a 0.099% return. So investors absolutely do not want a mature company hoarding cash.
This situation is made worse because income investors would have pushed the price perhaps higher than 10x, but instead now punish you by paying less than 10x of profit.
Not quite. Future profits have value, and a company paying dividends probably has good future profit prospects. So the value will be somewhere between $100 and $95, depending on expected profits and the time value of money.
the dividends are not related to stock price- although logically, dividend paying stocks should make a stock more valuable.
Dividends are just a portion of profits paid out to public investors. Companies that don't pay dividends on C class stock still pay dividends on other classes of stock.
The logic is really stock price management, as I answer above. A secondary reason is simply cash management. You don't want your managers feeling rich and simply wasting money on acquisitions or otherwise splurging on themselves.
"market cap is how much shareholders think that profit stream is worth"
=> Wrong, Market Cap has little to do with what you mentioned. It is calculated by determining the total dollar market value of all of a company's outstanding shares.
We presume that no one owns shares of a company just for bragging rights. (This might not be 100% true.) We presume that no one owns shares of a company because they're irrational. (This is 100% false. But hey, economics has to assume something.)
People own shares of a company because they can get money for owning it. They can get money by being paid dividends, and they can get money by selling it to someone else after the price rises (or stays the same, or goes down). That other person will only pay for it based on the same thing: dividends paid plus the value of selling it to someone else.
So the total value of the company should be the current value of the company's total future dividends. We calculate it by multiplying the current price by the shares outstanding, but it's presumed to be an estimate of the future dividend stream.
Dividends are not actually the only way to return money to shareholders.
Due to the tax situation in the US, it's more efficient to just buy back your own stock (something Apple's been doing a lot lately). Those function more-or-less-the-same as dividends in terms of returning the profit the company has made back to its owners (so they can invest somewhere else, presumably).
We often ridicule tech companies for having inflated valuations. I don't disagree with this in general.
In your specific comparison, which company do you genuinely think will grow more over the next N years? Google has shown the ability to dominate multiple markets time after time.
I can't see Exxon as any more than an oil company. There's certainly nothing stopping them (any more than any other business) from innovating.
The only market that Google has ever dominated profitably is search engine advertising. Despite, Glass, self driving cars, Android (free), Feedburner (dominated and shuttered) Gmail, Maps, etc... 96%[1] of their revenue is from selling ads.
I love a lot of Google products, but the only one they make any money on, is one I despise. It pays for everything else.
I was thinking about it last time. And it's sad that it's 2014 and most tech companies that get tons of press and admiration make money with advertisement, something we all hate.
Doubtless there are some (perhaps even many, in certain circles) who would rather pay directly for services, but you're sorely mistaken if you think that it's anywhere near-universal (even on HN/in tech) that people hate ads more than they hate paying. What you actually mean is "something we all hate, given that we feel entitled to getting services completely for free".
https://en.wikipedia.org/wiki/ExxonMobil
(101 for anyone who doesn't know this: revenue is how much you sell, profit is what's left over for shareholders, market cap is how much shareholders think that profit stream is worth).
Relevant: check out wikipedia's rankings of company size:
https://en.wikipedia.org/wiki/List_of_largest_companies_by_r... (and the see also)