I’m letting the fat dividends I get from Total build my position in an energy name that has long-term appeal.
France’s Total (NYSE:TOT) is one of a small group of global integrated energy giants. Its roughly-7% yield, meanwhile, is one of the highest in its exclusive peer group, and I’m using those dividends to buy more shares every single quarter. I like the company’s oil and natural gas exposure — but the real allure is bigger than that. Here’s why I just bought more Total stock, and while I’ll keep using dividend reinvestment to buy more.
I owned U.S. energy giant ExxonMobil (NYSE:XOM) before the 2020 coronavirus pandemic upended the oil market. The stock’s high yield and long history of annual dividend increases were two key reasons for that investment, but I also appreciated that Exxon was maintaining its focus on oil and natural gas, and that it had a rock-solid balance sheet. None of this has changed, but when I needed to offset capital gains elsewhere in my portfolio I sold my Exxon stake to harvest some tax losses. I took the opportunity to reevaluate my position in the energy space.
What I decided was that I wanted a company that was dedicated to oil and natural gas, but also one that had set out a long-term plan to adjust with the times. Put simply, I was looking for a dividend-paying energy company with an explicit clean energy goal. Exxon is dabbling in the space, but it really hasn’t outlined a long-term goal. Neither has U.S. peer Chevron. Meanwhile, BP (NYSE:BP) and Royal Dutch Shell have clean energy plans, but both cut their dividends last year. Only Total has laid out a plan and maintained its dividend.
In fact, the company has been very clear that the dividend is a big part of investor returns. Notably, during the worst of the energy downturn, it repeatedly told investors that it believed the dividend was sustainable as long as oil averaged around $40 per barrel. That provided me, and all investors, a metric to monitor that neither Exxon nor Chevron was giving. Although Total’s leverage is higher than Exxon’s, I liked the dividend “line in the sand” and the stated long-term clean energy plan.
The world is clearly shifting toward low-carbon energy sources. All of the major oil companies know this, and each is taking a different approach. BP, for example, plans to drastically reduce its production of oil over the next decade (by around 40%). Exxon, on the other hand, is taking the stance that energy transitions take a long time, and that oil and natural gas will be needed for years to come. In fairness, Exxon isn’t ignoring the clean energy trend, but it isn’t moving aggressively either. Total is somewhere in between these two extremes.
Total’s goal is to grow its oil and natural gas business between 2019 and 2030. However, the expectation is that oil’s contribution will shrink from around 55% of the overall business to 35% as the company focuses on its best investments. Natural gas will expand from 40% to 50% as the company pivots toward a fuel that is expected to help the world transition from carbon energy sources to renewable power. Together these two businesses will be bigger than they are today if things go according to plan.
At the same time, however, Total will be using the money provided by these legacy cash cow operations to triple the size of its “electrons” business. The goal is to increase this from 5% of the company to 15% by 2030. This is going to be supported by a ramp-up in investment in the low-carbon business, marked by a 33% increase in capital spending between 2021 and 2025. That will step up again between 2026 and 2030, when the spending will be double pre-2021 levels. That will take the total to around 20% of the company’s overall capital spending plan.
Notably, Total isn’t new to the clean energy space — it has been investing in renewable power for years, so this isn’t a massive change of direction. It’s more of a refinement of the plan to speed up the clean energy shift as the world increasingly focuses on the space. But when paired with the company’s energy plan, it strikes me as a solid middle-of-the-road approach.
To be fair, Total is hardly the perfect energy stock (if there is such a thing). It has more leverage than I’d like, and while I believe the dividend will hold, dividend growth isn’t something I’m expecting to see. However, with such a high yield, a clearly stated commitment to the dividend, and a plan to adjust with the world as it shifts toward clean energy, I’m willing to keep putting cash into Total via dividend reinvestment. For me, it’s the right name in the sector as the energy the world consumes slowly changes form.This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.