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 resulted in many once-strong dividend stocks being forced to cut their payouts. Yet ExxonMobil (XOM 1.34%) has managed to avoid a payout cut, and with the exception of the past year when it held firm on its payout, it has actually been able to increase the amount of dividends it pays to shareholders every year for more than three decades.
But we know the days of oil as the dominant source of energy are numbered. Renewables are getting cheaper, more reliable, and able to meet more and more of humanity's growing thirst for power. And that's been a boon for Clearway Energy (CWEN +0.56%)(CWEN.A +0.57%), which develops and operates renewable energy and efficient natural gas power plants, selling the electricity on long-term contracts, and then rewards investors with a strong -- and growing -- dividend payout.
But which is the better dividend stock? The stalwart in the oil patch with some of the best vertical integration and low-cost crude oil, or the fast-growing producer of clean energy? For this investor, as much as there's a lot to like about ExxonMobil's economic prospects for the near term, I think investors would do far better to buy Clearway Energy today, and own it for decades to come.
Image source: Getty Images.
The case for ExxonMobil
There's no getting around the reality that carbon reduction is a massive global priority. The health and environmental impacts of climate change and fossil fuel emissions are real and represent 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 for it.
But that future is probably further out than many may realize, and if you're looking to make money, ExxonMobil's relentless focus on extracting oil and gas to feed an energy-hungry world can be compelling. Let's demonstrate just how strong its business actually is, using last year's coronavirus lockdowns, which crashed oil prices and demand, as our background.
Even during this brutal period for the global oil industry, ExxonMobil still generated over $14 billion in operating cash flow, while free cash flow was negative $2.6 billion:
XOM Free Cash Flow data by YCharts
It's worth noting that ExxonMobil made $17 billion in capital expenditures during the course of the year, largely investments to continue developing the resources it will rely on for profits in the years ahead. That's a 29% cut from the prior year, but a lot of money management spent to protect its future cash flows.
During 2020, management relied heavily on the balance sheet to ride out a brutal year. It added debt to fund some of its capex and make sure it carried enough cash to ride out the downturn, and the board decided to hold firm on its $0.87 per-share quarterly dividend, despite a great reason to cut it.
That bet has paid off in 2021. The recovery in oil demand and rising oil prices this year has resulted in a recovery in operating cash and free cash flows. Here are the company's results from just the first quarter of 2021:
XOM Free Cash Flow (Quarterly) data by YCharts
ExxonMobil generated more operating and free cash in just the first quarter of 2021 than it did during all of 2020. That's a very positive sign for ExxonMobil's prospects as we continue to move beyond the coronavirus pandemic. With shares still more than 40% below the five-year high, there's an argument that the stock price has plenty of room to run -- even more incentive to buy ExxonMobil now.
If you're mainly looking at the dividend, the 6% yield at recent prices is incredibly attractive. Most importantly, the payout is probably very secure at this point in the recovery.
Why Clearway is worth owning
Clearway hasn't gone unscathed in recent years, either. After years of solid growth, the company had to slash its dividend payout in 2019 when one of its biggest customers, Pacific Gas & Electric, went through bankruptcy, restricting Clearway's access to a lot of cash from this major customer.
However, just as management promised, its contracts with PG&E -- and the all-important cash flows they generate -- were restored when the California utility emerged from bankruptcy. As a result, Clearway's dividend has surged:
CWEN.A Dividend data by YCharts
Just as important as the recovery of those cash flows, Clearway has steadily become more diversified. It has more than 4,400 megawatts of wind and solar plants, almost 1,500 megawatts of geothermal power production, and 2,472 megawatts of the newest, lowest-emission natural gas power to complement its extensive and growing renewables base. The cash flows from those assets is locked up with an average of 13 years remaining on its contracts.
Looking ahead, Clearway is primed for growth. It has a 10-gigawatt pipeline of 100% zero-emission projects; this pipeline of projects is the feeder for Clearway's future growth. Energy storage is a growing part of the mix, too. Battery costs are falling, and capacity is rising, meaning that wind and solar will continue to take share from fossil fuels.
What's in it for investors? There's the 5% dividend yield at recent prices, which takes up between 80% and 85% of cash flows, a relatively conservative amount for this kind of business. Next is the growth prospects. Renewables make up a small portion of the global energy mix. Well-run companies like Clearway are primed to take more and more market share to meet the world's energy needs.
That growing demand will drive more investment in renewables, resulting in growing cash flows for Clearway and a rising dividend that will attract even more investors.
Clearway: The winner for today and tomorrow
I can see the attraction with ExxonMobil. The stock price is still well below its all-time high, and rising oil prices and recovering demand -- along with years of underspending to develop more oil and gas resources -- could prove a boon for the company and its shareholders in the next few years. However, there's also the significant volatility in the oil markets and the risks of OPEC+ -- mainly Saudi Arabia and Russia -- battling for global market share, cratering oil prices and undermining the source of much of ExxonMobil's profits. So it's far from a sure thing.
With Clearway, you have a far more predictable path to current and future profits. Falling costs for wind, solar, and battery tech is good for it, lowering development and operating costs, and the long-term contracts it signs with utilities and other large power users lock in its cash flows for decades at a time. That, along with the growing diversification of its customer and geographic base, should result in steady, growing cash flows, and dividends, for many years to come. And it sure doesn't hurt that you know you're taking a stake in a company that's doing good for the environment, too.
