Why You Should Buy Imperial Oil

The executive team at Imperial Oil may be the best in the oil patch. One chart shows why.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

“The metric that the press usually focuses on is growth in revenues and profits. It’s the increase in a company’s per share value, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO’s greatness.”

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

When we invest in a company, we are entrusting our capital to management. It’s logical to assume our return on investment will only be as good as the people running it. As evidenced by the single graphic below, it’s clear that the executive team at Imperial Oil (TSX: IMO) is the best in the Alberta oil patch.

Why should I buy this stock?

At first glance, there’s no compelling reason you should.

According to the company’s own guidance, production is expected to grow 10% annually through 2020. But the company’s oil sand rivals such as Canadian Natural Resources and Suncor are growing output even faster.

How about dividends? Once again Imperial disappoints. At 1.01% the stock has the lowest yield amongst its peers. Income hungry investors can easily triple their income stream in names like Cenovus or Husky Energy.

This might be acceptable if Imperial was “cheap.” But on most conventional valuation metrics — such as EV/EBITDAX, price to earnings, or price to book — the stock actually looks a little expensive.

The case to buy Imperial Oil in a single chart

Of course, basing any investment decision on a single statistic would be foolhardy. However, the case to buy Imperial Oil could probably be summed up by this graphic.

What does the chart show? Imperial Oil is (by a mile) the best capital allocator in the Alberta oil patch.

In the energy industry, we have a useful metric to determine how well a management is allocating our money: return on capital employed, or ROCE. This metric is important in capital intensive industries such as airlines or semiconductors.

What Imperial has that its competitors lack is discipline. The company only allocates capital to its highest returning ventures. If management cannot find enough new projects that meet a high return threshold, they will return excess capital to shareholders through dividends and buybacks. Over the past 20 years, the company has repurchased over half of its outstanding shares. That means shareholders have been able to double their stake in a wonderful business tax-free.

Screenshot 2014-03-16 at 11.45.18 AM.png

Source: Imperial Oil Investor Presentation

Imperial’s rivals, as apparent by the chart above, are a little too eager to deploy that capital into low quality projects. Managing over a larger corporate empire may stoke some management egos, but happy executives never put money in my pocket. Sure, Imperial could have grown faster as its competitors did. But that would require expensive investments and shareholders may be able to find better returns elsewhere.

Foolish bottom line

Great executives focus on generating returns for shareholders and not growing the size of the business. Sometimes those are synonymous. Sometimes they’re not. Imperial’s management team understands this better than anybody, and that’s why the stock deserves a long-term place in your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no positions in any of the companies mentioned in this article.

More on Investing

funds, money, nest egg
Dividend Stocks

TFSA Passive Income: 2 Great Canadian Dividend Stocks for Retirees to Buy Now

Retirees seeking reliable passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

man window buildings
Stocks for Beginners

Foolish Beginners: 1 Stock Pick to Buy Now for a $6,000 TFSA

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) stock looks cheap as shares regain their footing.

Read more »

data analyze research
Dividend Stocks

Earn Monthly Passive Income: 2 Hot Dividend Stocks in Canada to Buy Now and Hold Forever

These two hot dividend stocks could help you to earn stable monthly passive income in Canada.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Be a Landlord: Top 2 REITs (With Monthly Dividends) I’d Buy and Forget

You can be a landlord and earn monthly dividends for the rest of your life. All you need is the…

Read more »

Target. Stand out from the crowd
Investing

3 Canadian Stocks to Buy That Beat Their Earnings Expectations This Week

If you're looking for top Canadian stocks to buy, here are three impressive companies that continue to perform well in…

Read more »

A stock price graph showing declines
Energy Stocks

2 Cheap Canadian Stocks That Likely Won’t Be on Sale For Much Longer

These two Canadian stocks are close to returning to all-time highs. Don’t miss your chance to take advantage of these…

Read more »

A worker gives a business presentation.
Dividend Stocks

Got $5,000? 3 Stocks to Hold for the Next 20 Years

New investors don’t need tens of thousands to start a portfolio. Here are three stocks to hold for the next…

Read more »

canadian energy oil
Energy Stocks

3 Rising Energy Stocks to Buy as Oil Hits 6-Month Low

Three rising energy stocks are strong buys today as their upward momentum is likely to continue due to the tight…

Read more »