The path toward transitioning to renewable energy has been fraught with hurdles. Renewable energy, including wind, solar, and biofuels, are gaining traction in the U.S., but still do not hold significant places within the production portfolios for the biggest super-majors. For example, Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) do incorporate renewables into their portfolios, but only to a very small degree. The vast majority of their production still comes from oil and gas, despite the fact that the economics of using renewables as a source of energy have improved significantly over the past several years. These companies even acknowledge demand for renewables is likely to outpace demand for fossil fuels; Exxon Mobil has estimated renewables will comprise 25 percent of energy demand by 2040.

One reason for why the integrated majors are not investing more heavily in renewables could be that billions of dollars of their cash flow is tied up every year in buying back stock and paying dividends. In an uncertain global economy, made worse by increasing market volatility, investors are demanding returns of capital. This has proven to be an anchor of sorts. Exxon Mobil and Chevron aren’t as freely able to invest in new energy technologies with the burden of having to pay sizable dividends each quarter without interruption. Dividends represent one of the largest uses of cash flow for Exxon and Chevron. Shareholders demand billions in dividends each and every quarter, which could be preventing Big Oil from making the necessary investments to transition their production portfolios to renewables.

Dividends are bleeding Big Oil dry

Exxon Mobil and Chevron have earned high reputations among investors largely because of their reliable dividends. Their dividend yields, which are their annual dividend payments as a percentage of their share prices, are 3.3 percent and 4.2 percent, respectively. That might not sound like much, but it amounts to a significant burden considering they each have billions of shares outstanding. Last year, Exxon Mobil distributed $15.1 billion to investors in combined dividends and share repurchases. While Chevron halted share buybacks last year to preserve cash, it still paid out $8 billion in dividends in 2015.

It is understandable that investors are demanding steady cash payments, in light of the collapsing stock prices across the energy sector. But such high dividends are proving to be significant weights hanging on Exxon Mobil and Chevron. In response to low commodity prices, they have each cut costs to the bone, primarily so that they could keep paying dividends. Exxon cut capital spending by nearly $7.5 billion last year, while Chevron slashed capital expenditures by $9 billion in 2015.

There is even pressure for them to raise dividends, no matter the underlying economic conditions. Heading into 2016, both Exxon Mobil and Chevron were part of the so-called Dividend Aristocrats, a select group of companies in the S&P 500 Index that have increased their dividends for at least the past 25 consecutive years. Exxon Mobil raised its dividend by 2 percent earlier this year, and even sacrificed its coveted ‘AAA’ credit rating to do so. In some cases, they have even had to borrow to keep paying their dividends. Chevron borrowed $11 billion just last year.

Because of the deteriorating fundamentals, analysts remain negative on Exxon Mobil and Chevron. Analysts currently forecast Exxon Mobil’s earnings to decline 31 percent in 2016; at the same time, analysts expect Chevron’s earnings to fall 65 percent this year. Because of this, Chevron was downgraded in March by analysts with Raymond James, from outperform to market perform.

Shareholders need to be more flexible

It is important to remember that oil and gas are finite resources and the rigidity of their investors is making it very difficult for Exxon Mobil and Chevron to have the financial flexibility to invest in new technologies that could fuel future growth. And, with commodity prices plunging over the past two years, their current strategies are causing losses to pile up. For example, while Exxon Mobil remained profitable last year, its net profit fell by 50 percent in 2015. Chevron lost $588 million in the fourth quarter 2015, and followed this up with a $725 million net loss in the first quarter 2016.

Allocating more resources to investing in renewables is not only the right decision in the context of the huge problem posed by climate change, but it makes business sense as well. Continuing to increase production, which these companies have, just to keep paying dividends, is a losing strategy. Investors would likely be disappointed if dividends were frozen or cut, but that is a short-term issue. It stands to reason that investors would be far worse off if Exxon and Chevron permanently damaged their long-term growth prospects because of a failure to adapt. This issue has come to the forefront in recent weeks.

Both Exxon Mobil and Chevron held their annual stockholders’ meetings in May, and there were climate change resolutions up for votes at both events. These resolutions would have required the companies to conduct stress tests to determine the risks that climate change could pose to their reserves and business models. Exxon Mobil shareholders rejected 10 proposals backed by environmentalists. Among the initiatives that were defeated, one called for a formal policy designed to combat global warming, to develop a comprehensive report on fracking activities, and to put a climate expert on the company’s Board of Directors. None of the proposals received more than 25 percent support. Furthermore, Exxon Mobil shareholders rejected a proposal to support the goal of the UN meeting in Paris to limit global warming to two degrees Celsius above pre-industrial levels. Chevron investors considered five proposals, none of which garnered more than 41 percent support.

Companies to watch

Among other companies that have resisted efforts to invest more significantly in renewables are BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-B). One reason for this could be because BP and Royal Dutch Shell have even larger dividend burdens than Exxon Mobil and Chevron. Based on their current share prices, BP and Royal Dutch Shell pay dividend yields of 7.5 percent and 9 percent, respectively.

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.