Oil and natural gas are carbon fuels vital to the world economy. They aren't going to be retired from the energy landscape overnight, even though the world is shifting toward cleaner alternatives. This transition means that oil companies have to make a choice in how they navigate their futures. TotalEnergies (TTE 0.14%) is the name that I think has the best plan, and that's why it is still my top oil pick.
I am a dividend investor, so dividend consistency is one of the most important factors I consider when looking at a stock. Given the highly volatile nature of oil and natural gas, there are only a small number of consistent dividend names to look at in the energy sector. Tops on the list are easily ExxonMobil (XOM 0.16%) and Chevron (CVX 0.66%), which have both increased their dividends annually for decades. While TotalEnergies doesn't stack up in that regard, it did earn my respect during the pandemic downturn in 2020.
Essentially, management came out and stated that it would maintain the dividend as long as oil remained above $40 per barrel. And it made that commitment early on, highlighting that line in the sand during TotalEnergies' second quarter 2020 earnings call. No other major peer made such an explicit commitment, not even Exxon or Chevron. In fact, European peers BP (BP 0.87%) and Shell (SHEL 0.09%) both chose to cut their dividends (more on this in a second). TotalEnergies' willingness to stand so openly and strongly behind its dividend during a highly uncertain time materially raised its stature in my thinking.
The dividend yield, meanwhile, is at the high end of the peer group, at 5.6%. To be fair, some of that extra yield has to do with the French taxes that will be taken out of the dividends that U.S. investors receive. Those taxes, however, can be clawed back, at least in part, when you file your taxes. And now that the energy market has recovered, TotalEnergies has increased its dividend. The 5% hike shows that investors aren't just getting a high yield but a growing payout as well. I was hoping for dividend growth here, but given the high yield, I wasn't counting on it. So the recent hike is icing on the cake for me.
The long tale
But that's just the here and now of TotalEnergies' story. Remember that oil and natural gas are slowly being displaced by cleaner energy options like solar and wind power, among other things. That's where the dividend cuts at BP and Shell come in, as they announced plans for clean energy transitions at roughly the same time as they announced their dividend cuts. They basically chose to hit the reset button. TotalEnergies, by comparison, announced its clean energy transition plans but didn't resort to a dividend cut. Chevron and Exxon, meanwhile, haven't really embraced the clean-energy space to the same degree as their European peers.
That makes TotalEnergies something of a middle-of-the-road play here. You get the dividend, and you get the clean-energy transition. That transition is slated to expand the company's electricity business from 5% of the total in 2019 to 15% in 2030, essentially tripling the size of the division. The company is also working on getting biofuels up to 5% of its business. At the same time, the energy company is planning to shrink its oil operation to around 30% of the total from 55%. And management intends to expand its natural gas division from 40% to 50% of the company.
There are a lot of moving parts to consider, but what's going on is that TotalEnergies is making an effort to focus on only its best oil investments as it shifts toward cleaner fuels. That includes natural gas, which is expected to be a key transition fuel as the world shifts in a green direction. And the oil giant is making a lot of investments that prove it is serious about this corporate overhaul. When you add this information to the very clear support management has shown for the dividend, TotalEnergies stands out from its peers as a long-term holding.
Don't trade -- buy and hold
There's an important caveat here, as TotalEnergies probably isn't the best way to play the short-term ups and downs of the energy space. And given its shift toward clean energy, it is not a pure-play oil/natural gas name anymore. But that's really the point. For investors who want to have long-term exposure to the broader energy sector as it transitions in a cleaner direction, TotalEnergies is the dividend option that may make the most sense. At least it does for me, and that hasn't changed at all, even though oil prices have rebounded from their 2020 lows.