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Better Buy: Brookfield Renewable Partners vs. Exxon Mobil

By Jason Hall – Updated Apr 17, 2019 at 5:44PM

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In one corner, an oil giant with over 35 years of consecutive dividend growth. In the other, an up-and-comer in renewables with an ultra-high yield.

If you're looking for a solid dividend yield from an energy stock, two names that might be on your list are ExxonMobil (XOM 0.12%) and Brookfield Renewable Partners (BEP 0.41%). While one is the epitome of big oil and the other is more representative of the future of energy, both are known for their high dividend yields, strong cash flows that keep those payouts secure, and long track records of growing their dividend payments on a regular basis. 

Furthermore, both have things in their favor that could make them compelling investments right now. ExxonMobil sits on some of the cheapest oil and gas assets in the world and plans to better-leverage its integrated business could see it pump a gusher of profits in coming years. On the other hand, Brookfield Renewable owns some of the best, cheapest, renewable energy-producing assets in the world, and its management has proved incredibly skilled at growing its cash flows over time. 

Man standing in front of chalkboard, looking pensive, with balance scales drawn on the board.

Image source: Getty Images.

So which is the better buy right now? The turnaround play in ExxonMobil, or the up-and-comer in Brookfield Renewable? 

The case for ExxonMobil

It's been a bit of a lost decade for the oil giant, and its investors. Since Jan. 31, 2009, 10 years before this writing, ExxonMobil's stock price has dropped 4.3%, while the broader stock market has come soaring out of the ashes of the Global Financial Crisis:

XOM Chart

XOM data by YCharts

It may not seem like a fair comparison, considering the past decade has been one of the longest, best bull markets in American history. But that's kind of the point. Even from the bottoms of the worst stock market decline in 80 years, which should be a huge head-start on strong future returns, ExxonMobil has made for a terrible investment. 

Heck, it's even underperformed bonds over the past decade:  

XOM Total Return Price Chart

XOM Total Return Price data by YCharts

Yet even as it struggled to deliver decent value for shareholders, it did continue to deliver industry-leading returns:

XOM Return on Invested Capital (TTM) Chart

XOM Return on Invested Capital (TTM) data by YCharts

The problem is that, over the past decade -- particularly the past half-decade, since oil prices have fallen from the $100-plus peak in 2014 -- the company hasn't been able to turn those returns on investments into bigger profits. ExxonMobil's earnings per share were actually 28% less than they were 10 years before, and that's after a big improvement over the past year: 

XOM EPS Diluted (TTM) Chart

XOM EPS Diluted (TTM) data by YCharts

Which brings us to the bull case. ExxonMobil is in the early stages of a strategy that's aimed at better leveraging its ultra-cheap oil holdings, and its integrated assets, to turn more of every barrel of oil it pumps, refines, or sells, into more profits. By 2025, management says it will have doubled cash flows from 2018 levels

That's an ambitious plan, but ExxonMobil continues to be one of the best in the business at capital allocation. Many of its struggles over the past decade have been tied to the reality that oil sells for about 60% of the price it commanded for much of the first half of the past decade. From here out, ExxonMobil aims to be a low-cost leader starting with its oil production, and then leveraging its operating assets to yield industry-leading returns. 

If it does that, buying shares today for about 13 times trailing earnings could turn out to be one of the best bargains of the decade. Add in a dividend that yields 4.4% and tends to get a bump every year, and this big-oil behemoth could be a huge winner. 

Check out the latest Exxon earnings call transcript.

The case for Brookfield Renewable

While ExxonMobil has struggled to deliver decent returns for its shareholders over the past decade, Brookfield Renewable Partners, which owns a collection of hydroelectric, wind, and solar energy-producing assets, has been a pretty great investment:

BEP Total Return Price Chart

BEP Total Return Price data by YCharts

At its core, it's because Brookfield Renewable's core business is not tied to a volatile and unpredictable commodity like oil, but a far-more predictable commodity, electricity. In short, Brookfield renewable makes a living producing electricity and then selling it to utilities. Almost all of its production is sold under long-term contracts at fixed prices that include escalators for inflation.

Furthermore, unlike oil, Brookfield Renewable doesn't deal with a volatile commodity it must buy to produce electricity, though variances in wind, sun, and rainfall do affect how much power its facilities produce and it can sell. The end result is a business that generates remarkably steady, predictable cash flows, a large portion of which management is committed to return to shareholders. 

At recent prices, Brookfield Renewable dividend yield is a generous 6.8%, and management's long-term goal is to increase the payout between 5% and 9% annually. It's certainly been able to do that; over the past five years, the payout has been raised every year, and it's up nearly 90%. 

Moreover, it has one of the best pathways to future growth of any company in the energy industry. Between the impacts of hydrocarbon emissions on the climate and environment, the higher cost of energy from coal, nuclear, and even natural gas, renewables like wind, solar, and hydro are set to gain the majority of future investments. According to a recent company presentation, it would require $5 trillion in investments globally simply to get half the world's energy production shifted to renewables. Want to see a 100% renewable-energy future? Move the needle to $11 trillion. 

Wind turbines and solar panels.

Image source: Getty Images.

That's a massive market opportunity. Furthermore, Brookfield Renewables is already winning the cost battle. Wind energy is cost-competitive with any other source of electricity, while solar is quickly closing the gap. As technology improves and drives the cost of power generation down even further, investments in renewables are likely to accelerate further. 

And as Brookfield Renewables has already proved over the past decade, the best place to invest is in the power-generating assets, and no other management team has shown itself to be as skilled at capital allocation over the long term. 

Look to the future

While there's much to like about ExxonMobil's prospects, I think investors will do much better over the long term to invest in Brookfield Renewable Partners. As much as ExxonMobil continues to deliver high rates of return, owns some great low-cost oil and gas assets, and should be able to leverage its integrated business to deliver even better future returns, there are too many questions surrounding fossil fuels for me to pick it over Brookfield Renewable. 

Frankly, there's no predicting whether oil prices will rise, fall, or hold steady in the future -- though they will almost certainly do all three at different points -- and more importantly, it's hard to predict how much future demand for oil will grow. 

Renewables, however, will certainly continue to grow in demand, while costs will fall. And since I'd rate Brookfield Renewables' management team right up there with ExxonMobil's when it comes to discipline and strong capital deployment skills, you have to go with the business that has the better, more predictable path forward. 

And that's clearly Brookfield Renewable Partners. 

Jason Hall owns shares of Brookfield Renewable Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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