If something cannot go on forever, it will stop. Saudi Aramco, the world’s largest oil company, isn’t an exception — despite its $1.5 trillion-plus market value. With oil prices at $75 a barrel and production constrained by OPEC+ cuts, the state-owned company cannot afford its total dividend anymore. Lower payouts are looming.
Year-to-date, Aramco has paid dividends of $93.2 billion, financed by taking on debt as its free cashflow amounted to just $63.7 billion during the same period. Put simply, Aramco has burned through more than $100 million a day – a day – to finance its distribution to shareholders. Even the fortress-like balance sheet of the Saudi company cannot sustain that for ever.
The likely reduction matters to the Saudi government, which still controls about 97% of the company’s equity and relies on its largesse to finance its extravagant spending. It matters, too, to the few international investors that the Saudis have lured into Aramco with the promise of lavish payouts.
In some ways, the cut would be natural. Aramco pays two dividends: a base one, worth just over $20 billion per quarter, plus a so-called “performance-linked” payment worth just shy of $11 billion. When the company announced the introduction of its performance payout in mid-2023, after the Russian invasion of Ukraine sent oil prices to $100 a barrel, it guided investors to expect performance payouts for six quarters. If Aramco sticks to its plan, the sixth instalment would be declared in the current fourth quarter.
The Saudi government has used the big dividends to attract more investors in the hope of being able to sell small chunks of the company every few years. After the initial public offering in late 2019, Riyadh followed up with a secondary public offering in June. Buybacks, the preferred route for Big Oil to return extra capital to shareholders, aren’t an option for Riyadh, because they would further reduce the stock’s already minimal free float.
The extra dividend boosted the financial attraction of Aramco for the second share sale. At current market prices, the company trades at an unusually large dividend yield north of 7%, way higher than the 3.5% to 4.5% of Exxon Mobil Corp. and Chevron Corp. But even at such a generous level, few investors have taken the bait. This year, Aramco shares have underperformed all of its Big Oil rivals, including badly performing BP Plc.
If Aramco has to reduce its total dividend significantly in 2025, the underperformance is only going to get worse. Looking at its latest quarterly earnings, published on Tuesday, it doesn’t look like it will be able to extend its performance dividends any more.
When the extra payouts were introduced, Aramco said it intended to return 50% to 70% of its annual free cash flow, net of the base dividend and other expenses, to shareholders. But now, that income barely covers the base dividend. During the third quarter, Aramco reported free cash flow of nearly $22 billion and a base dividend payment of $20.3 billion. With oil down and the OPEC+ deal preventing Aramco from raising output, earnings are likely to drop further in the final three months of the year; it wouldn’t surprise me if Aramco can’t cover its base dividend between October and December.
In a worst-case scenario, the company won’t declare any performance dividend at all from early next year, reducing its quarterly dividend to about $21 billion in 2025, down nearly a third from this year’s total payouts. Aramco, of course, may get lucky if oil prices recover, perhaps due more geopolitical upheaval. It also may take on more debt to sustain higher payouts than its earnings alone would allow.
The beauty of the Saudi oil giant is that it can afford to undertake that kind of financial effort for a while. Compared with its peers, it remains virtually debt free. At the end of the third quarter, its gearing stood at just 1.9%, well below the 10% to 20% typical of Big Oil. Aramco targets gearing of 5% to 15%, so it can add another $50 billion in net debt without breaching its own targets. But taking on huge amounts of debt to finance dividend payments would only spook foreign investors, already lukewarm to the company’s financial messaging.
The prudent solution is to reset expectations — soon. The performance dividends will go away at the end of this year. Aramco can give assurances that its base dividend for 2025 is safe, even if for a few months it needs to borrow a bit more to offset lower oil prices. The balance sheet can tolerate such a move; it would also give Aramco room to reset its base dividend at a higher level.
But the kingdom would need to accept that with lower payouts comes a lower valuation. Aramco is a great company – but there’s an original sin: the royal’s insistence that it’s worth $2 trillion, no matter what. It isn’t worth that much — and financial engineering won’t bridge the gap.
