ESG Investing Means Oil Will Go The Way Of Tobacco

Nov. 17, 2021 9:38 AM ETBTAFF, BTI, IMBBF, IMBBY60 Comments21 Likes


  • We're not there yet, or at least not quite, but the spread of ESG investing will give the rational among us a significant opportunity.
  • The more people avoid investing in anything upon moral grounds, then the lower the entry price into that investment.
  • As long as the returns continue through this just pushes up the dividend yield for those of us who don't invest with our morals.

Cigarette butts and ash on yellow background.

Bowonpat Sakaew/iStock via Getty Images

Unfashionable investments

We're all entirely aware that tobacco stocks are entirely out of fashion. Possibly even they're reasonably so. The result of this though is that the profit streams, the income streams are very cheap to buy into.

This is obvious and logical, the price of something reflects the demand for it. If lots of people have decided, for moral grounds, to not buy tobacco stocks then they'll be cheap. Cheap stocks mean high dividend ratios, obviously.

So, just as an example being mentioned just now, Imperial Brands (OTCQX:OTCQX:IMBBY). Currently yielding 9% on the London quote. And that's pretty safe too, reasonably covered, cigarette companies have pricing power. While the market is shrinking overall it's going to be a few decades before it's gone if it ever entirely is.

Much the same with British American Tobacco (NYSE:BTI) at 8.5% on that London quote.

OK, I like the look of those stocks as things to tuck away for the long term but that's not my point here at all.

Rather, when's this going to happen to oil stocks?

Fossil fuel stocks

We can see the same thing beginning to happen to fossil fuel stocks. There's all that rumble about stranded assets to deal with. I think that idea is nonsense but that's another matter. What's bigger is the ESG movement. Fund managers like Blackrock and so on, a roundup of investment firms led by Mark Carney (ex-Governor of the Bank of England) and other movements are persuading people not to invest in fossil fuel companies.

At present this really covers new investments, the divest now movement is really just a few pension funds and university endowments. But it's obvious that it's all coming along.

I'm not predicting any grand fall in fossil fuel company prices as a result, I think it'll be longer term, and we'll not see the rises we might expect instead. The effect will be the same though. Dividend yields will rise on these stocks over time.

We need to divide the market

I don't think this is applicable to all fossil fuel companies though. I think coal is, largely enough, on that slide down into actually being worth nothing. Thermal coal is definitely going that way and the number of anthracite providers for steel is pretty small.

Natural gas is pretty much fracking companies (or Gazprom and I'm not going there) and the capital cycle there is entirely different. Yes, wells can be re-fracked and so on but three still isn't a decade's long tail of output from an investment this year. So the financial profile is different.

Oil companies, particularly the big ones - Chevron, Exxon, BP, Shell - are what I'm really talking about. If they simply stopped investing in new projects today then they'd still be throwing off fountains of cash in two and three decades' time still. I've long suggested - but never tried to prove - that they might well be more profitable for shareholders if they did just that, stopped investing and just sweated their extant assets down to nothing. No, I'm again not suggesting that.

My point is that these are long-lived income streams. And yet they're going to be getting ever cheaper as ESG investing stops people from buying into them. For the savvy investor - or one not driven by the ESG vision - this provides an opportunity.

Buy into the income stream for that income stream alone.

Dividend trap

There's a common enough error out there, which is to spot a high dividend and buy for that alone. Without realizing that the company is really eating itself and soon enough it'll go broke for lack of capital.

That's called the dividend trap and we don't want to get into one of those. But this dividend trap is a specific thing. Particularly, it's that the investor doesn't get the high dividend for long enough to make up for the loss of the capital sum at the end. So, for example, getting 15% for two years followed by bust and nothing is a bad idea.

However, as long as we know what we're doing, and the time span is long enough, then it's not a dividend trap. It is, instead, just receiving our capital back as a portion of that dividend each year.

Take the 9% on Imperial (again, this is only mentioned as an example). If we gain 9% for 3 years then nothing then that's a loser. If we gain 9% for 20 years and then the end comes, well, that could be most attractive. If the rest of the market yields 3% then it could well be in fact.

There, with those numbers, we'd save and re-invest 6% of our annual 9%, take the 3%, and after 20 years we'd be ahead (assuming no capital growth in any prices, an unrealistic assumption).

Which is what the oil business is about to become I think.

The problem with the thesis

If everyone stops using oil by 2030, 2035, then those big oil companies are going to end up sitting on an awful lot of the oil that no one wants to buy anymore. I think that's a ridiculous assumption and think it most unlikely that will happen. 2050, maybe but not that much sooner than that.

That's the danger, that the crusade to stop oil use works and quickly. A more gradual decline will see investment demands fall, leaving that dividend stream strong for decades yet. But I expect the price to decline - relative to other stocks - as a result of the ESG movement making our move into the oil stocks profitable for us.

My view

I am certain this is going to happen. The divestment movement is going to lead to oil dividend streams being artificially cheap to buy into. This should then be something we do buy into. Just as with tobacco, making money is making money so why not?

The investor view

Of course, this depends upon attitudes toward making money. Some won't invest in what they consider immoral which is the entire point of those ESG funds. Some of us don't feel so bound.

It's also not really possible to predict when, exactly, will be the optimal point. When will prices have declined so much as a result of ESG, but still leave enough decades to make it truly profitable?

My intuition is that it's going to be soon given the speed with which this climate change work is carrying on. I'll also admit that it sounds very boring, investing for a dividend stream rather than capital gains. But as long as it's done inside a tax wrapper - thus allowing the reinvestment of the dividends without penalty - it's a perfectly sensible thing to be doing at some price.

Yes, I know this isn't a stirring call to action but it is still something to think about. Inside that IRA (or ISA for Brits) a bit of unfashionable stock with a high dividend yield as a result of that un-fashion makes good sense. Tobacco is already there, I think oil's not far behind.

This article was written by

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Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian:

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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