FRance’s Total(NYSE: TOT) is one of a small group of integrated global energy giants. Its yield of around 7%, meanwhile, is one of the highest of its exclusive peer group, and I use those dividends to buy more stocks each quarter. I like the company’s exposure to oil and natural gas – but the real appeal is greater than that. Here’s why I just bought more Total shares, and how I will continue to use dividend reinvestment to buy more.
The big switch
I owned from the United States energy giant ExxonMobil(NYSE: XOM) before the 2020 coronavirus pandemic upsets the oil market. The high yield of the stock and long history of annual dividend increases were two main reasons for this investment, but I also appreciated that Exxon maintained its focus on oil and natural gas and that it had a rock solid balance sheet. None of that changed, but when I needed to offset capital gains elsewhere in my portfolio, I sold my stake in Exxon to reap tax losses. I took the opportunity to reassess my position in the energy space.
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What I decided was that I wanted a company dedicated to oil and natural gas, but also a company that had established a long term plan to adapt to the times. Simply put, I was looking for a dividend paying energy company with an explicit goal of clean energy. Exxon is dabbling in space, but it really hasn’t set a long-term goal. Neither has an American peer Chevron. Meanwhile, BP(NYSE: BP) and Royal Dutch Shell have clean energy plans, but both cut their dividends last year. Only Total has drawn up 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 recession, he repeatedly told investors he believed the dividend was sustainable as long as oil averaged around $ 40 a barrel. This provided me and all investors with a metric to watch that neither Exxon nor Chevron was giving. While Total’s leverage is greater than Exxon’s, I liked the dividend “line in the sand” and the long-term clean energy plan laid out.
Oil, gas and more
The world is clearly moving towards low carbon energy sources. All the major oil companies know this and each takes a different approach. BP, for example, plans to drastically cut oil production over the next decade (by around 40%). Exxon, on the other hand, takes the position that energy transitions take time, and that oil and natural gas will be needed for years to come. In all fairness, Exxon isn’t ignoring the clean energy trend, but it isn’t moving aggressively either. The total falls somewhere between these two extremes.
Total’s goal is to grow its oil and gas business between 2019 and 2030. However, oil’s contribution is expected to increase from around 55% of overall activity to 35% as the company focuses on its best investments. Natural gas will drop from 40% to 50% as society shifts to a fuel that should help the world shift from carbon-based energy sources to renewable energy. Together, these two companies will be bigger than they are today if things go as planned.
At the same time, however, Total will use the money provided by these old cash cow operations to triple the size of its “electron” business. The objective is to increase this from 5% of the company to 15% by 2030. This will be supported by an increase in investments in low-carbon activity, marked by an increase of 33% capital spending between 2021 and 2025. This will increase again between 2026 and 2030, when spending doubles pre-2021 levels. This will bring the total to around 20% of the entire company capital expenditure plan.
In particular, Total is not new to the field of clean energy – it has been invest in renewable energy for years, so it’s not a massive change of direction. It’s more of a refinement of the plan to accelerate clean energy change as the world increasingly focuses on space. But when paired with the energy plan of the business, it seems to me like a solid middle ground approach.
Nothing is perfect
To be fair, Total is hardly the perfect energy store (if there is one). It has more leverage than I would like, and while I think the dividend will hold, dividend growth is not something I expect to see. However, with such a high yield, a clearly expressed commitment to the dividend and a plan to adjust with the world as it moves towards clean energy, I am ready to continue to invest money in Total via the reinvestment of dividends. For me, that’s the right name in the business because the energy the world consumes is slowly changing shape.
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