Better dividend stocks: ExxonMobil vs. Clearway Energy

Dividend investors have been burned by energy stocks in the past – the extreme volatility in crude oil prices we’ve experienced over the past decade has forced many once-strong dividend stocks to cut their payouts. Still ExxonMobil (NYSE: XOM) managed to avoid a cut in payouts, and with the exception of the last year where he stood firm on his payout, he was in fact able to increase the amount of dividends he pays out to shareholders each year for over three decades.

But we know that the days of oil as a primary source of energy are numbered. Renewable energies are increasingly cheaper, more reliable and able to meet more and more humanity’s growing thirst for energy. And it was a godsend for Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A), which develops and operates renewable energy and efficient natural gas-fired power plants, selling the electricity on long-term contracts, then rewards investors with a large and growing dividend payout.

But what is the best dividend-paying stock? The mainstay of the petroleum industry with some of the best vertically integrated, low cost crudes, or the fast growing producer of clean energy? For this investor, while there is a lot to like about ExxonMobil’s near-term economic outlook, I think investors would be much better off buying Clearway Energy today and owning it for decades to come.

The case of ExxonMobil

There is no denying that carbon reduction is a massive global priority. The health and environmental impacts of climate change and fossil fuel emissions are real and pose a very real threat. At some point in the future, the use of fossil fuels will become a thing of the past, and the earth will be better off for it.

But that future is probably further away than many realize, and if you’re looking to make some cash, ExxonMobil’s relentless focus on extracting oil and gas to feed an energy-hungry world can be compelling. . Let’s show how strong his business is, using last year’s coronavirus lockdowns, which brought down oil prices and demand, as a backdrop.

Even during this brutal time for the global oil industry, ExxonMobil still generated over $ 14 billion in operating cash flow, while free cash flow was negative at $ 2.6 billion:

XOM Free Cash Flow Data by YCharts

It should be noted that ExxonMobil made $ 17 billion in capital spending during the year, much of it investment to continue to develop the resources it will rely on for its profits in the years to come. That’s a 29% reduction from the previous year, but a lot of money management has been spent to protect its future cash flow.

In 2020, management relied heavily on the balance sheet to overcome a brutal year. It added debt to fund some of its investments and make sure it had enough cash to weather the downturn, and the board decided to maintain its quarterly dividend of $ 0.87 per share. , despite a good reason to reduce it.

This bet paid off in 2021. The recovery in demand for oil and the rise in oil prices this year has resulted in a recovery in operating cash flow and free cash flows. Here are the company’s results for the first quarter of 2021 only:

XOM Free Cash Flow data (quarterly) by YCharts

ExxonMobil generated more operating cash flow and available cash from the first trimester 2021 than throughout 2020. This is a very positive sign for ExxonMobil’s outlook as we continue to move beyond the coronavirus pandemic. With stocks still over 40% below the five-year high, there’s an argument that the stock price has a lot of wiggle room – even more incentive to buy ExxonMobil now.

If you look primarily at the dividend, the 6% yield at recent prices is incredibly attractive. More importantly, the payment is probably very secure at this point in the recovery.

Why Clearway is worth owning

Clearway hasn’t come out unscathed in recent years, either. After years of solid growth, the company had to cut its dividend in 2019 when one of its biggest customers, Pacific gas and electricity, went bankrupt, limiting Clearway’s access to this important customer’s much money.

However, just as management had promised, its contracts with PG&E – and the very significant cash flow they generate – were restored when the California utility came out of bankruptcy. As a result, Clearway’s dividend jumped:

CWEN.A Dividend data by YCharts

Just as important as collecting those cash flows, Clearway has gradually diversified. It has more than 4,400 megawatts of wind and solar power plants, nearly 1,500 megawatts of geothermal power generation and 2,472 megawatts of the newest and lowest emission of natural gas to complement its extensive and growing base. renewable energies. The cash flows of these assets are blocked with an average of 13 years remaining on its contracts.

Going forward, Clearway is poised for growth. It has a 10 gigawatt pipeline of 100% zero emission projects; this pipeline of projects is the engine of future growth for Clearway. Energy storage is also an integral part of the mix. Battery costs are falling and capacity is increasing, meaning that wind and solar will continue to take a share of fossil fuels.

What is there for investors? There’s the recent 5% dividend yield, which absorbs between 80% and 85% of cash flow, a relatively conservative amount for this kind of business. Next come the growth prospects. Renewable energies represent only a small part of the global energy mix. Well-run companies like Clearway are poised to take more and more market share to meet global energy needs.

This growing demand will drive more investment in renewable energy, which will lead to increased cash flow for Clearway and a growing dividend that will attract even more investors.

Clearway: Today’s Winner and tomorrow

I can see the attraction with ExxonMobil. The course of action is always good below its all-time high, and rising oil prices and recovering demand – along with years of under-spending to develop more oil and gas resources – could prove to be a boon to the company and its shareholders over the next few years. However, there is also the significant volatility of the oil markets and the risks of OPEC + – mainly Saudi Arabia and Russia – fighting for global market shares, crunching oil prices and undermining the source of oil. a large part of ExxonMobil’s profits. It is therefore far from being a certainty.

With Clearway, you have a much more predictable path to the flow and future profits. Falling costs for wind, solar, and battery technology are good for it, lowering development and operating costs, and the long-term contracts it signs with utilities and others. Heavy electricity users are blocking its cash flow for decades at a time. This, combined with the growing diversification of its customer base and geographic base, is expected to result in stable and growing cash flow and dividends for many years to come. And it certainly doesn’t hurt to know that you are taking a stake in a company that is also good for the environment.