Not all energy stocks are created equal, especially now that renewable energy and electric vehicles are becoming a meaningful part of our energy mix. Renewable energy generation is rising and it may be a matter of a few years before the world hits peak oil consumption if EVs keep improving at the rate they have.
With that backdrop, I think the renewable energy yieldco NextEra Energy Partners (NYSE:NEP) and its dividend yield of 3.8% is a much better dividend stock than ExxonMobil Corporation (NYSE:XOM) with the same yield.
Big oil is in trouble
The chart below shows a lot of information about ExxonMobil's business over the last five years. The first note is that its net income has dropped by over 75% and at the same time the company has been increasing its dividend. Naturally, the payout ratio -- or percentage of earnings paid out as a dividend -- has shot higher.
What happens when a company has a higher dividend payment than what you're earning? They have to take on debt, which is exactly what ExxonMobil has done.
The problem is that I don't see ExxonMobil's business getting much better from here. EVs are just starting to take off and countries like France, the U.K., and China have all discussed plans or have targets for eliminating gasoline and diesel-powered vehicles. If the current payout ratio is unsustainable and the technology and policy environment is working against your business model the future doesn't look very bright.
Renewables are gaining steam
Renewable energy is a big reason big oil is in trouble and it's growing globally at a rapid rate. NextEra Energy Partners is a company that owns renewable energy projects that have long-term contracts to sell electricity to utilities and then uses that cash flow to pay down debt and dividends. It's similar to owning a bond rather than a traditional energy stock.
On top of the stable operations for existing projects, NextEra Energy Partners can use its stock and new debt to fund project acquisitions, much like an MLP. If acquired projects have a rate of return higher than the cost of debt plus equity, they're additive to the dividend. As a result of this strategy, over the next five years, NextEra Energy Partners expects to raise its dividend 12% to 15% annually.
The advantage of a yieldco like NextEra Energy Partners is that it has stable cash flows, visibility to future growth, and is being propelled by a booming renewable energy industry. That's a great place for energy investors to be today.
NextEra Energy Partners is the better stock right now
Given where their businesses stand today and where energy trends are headed in the future, I think NextEra Energy Partners is the much better stock for dividend investors. ExxonMobil isn't even generating enough cash to sustainably pay its dividend today, compared to NextEra Energy Partners' plans for 12% to 15% growth over the next half-decade.
Sometimes the biggest names aren't the best investments. And in this case, ExxonMobil loses out to the much smaller NextEra Energy Partners in this dividend battle.