Sticking to its Guns: Saudi Aramco maintains $75bn dividend promise despite profit plunge

August 22, 2020

3 min read

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What's going on here?

Saudi Aramco, Saudi Arabia’s national petroleum company, has just reported a 73% second-quarter drop in profit. Yet the world’s largest oil exporter is pressing ahead with its plan to pay shareholders $75bn in dividends anyway.

What does this mean?

Aramco became the most valuable listed company in history when it floated on the Saudi Stock exchange last year, boasting the largest profits in the world (to see our article on that, click here). However, just like its international competitors, the company has suffered dramatically since coronavirus-induced lockdowns caused the price of and demand for oil to plummet. It has since been dethroned as the world’s most valuable company, a title that now falls to tech behemoth Apple. 

But this hasn’t tightened Aramco’s pursestrings, as it is still planning to pay out $75bn in dividends this year. This will come as a huge relief to the Saudi Arabian government, which owns approximately 98% of Aramco and relies heavily on these dividends to manage its fiscal deficit (the shortfall in a government’s income compared with its spending).

What's the big picture effect?

This appears to be a bold decision from Aramco, especially since some of its largest oil competitors are doing the complete opposite to cut their losses resulting from the COVID-19 pandemic. Earlier this month, BP halved its dividend for the first time in a decade after a record $6.7bn second quarter loss, while in April, Shell cut its dividend for the first time since the Second World War. 

However, looking more closely, this might just be a reasonable move on Aramco’s part. The resistance to slashing its huge dividend can arguably be explained by the fact that it only went public in December 2019. The road to its initial public offering proved a bumpy ride, with a number of social and political concerns surrounding the deal. Thus, it is likely that the company will not want to disappoint those investors who kept the faith. The fact that Aramco’s dividends also play a critical role in financing the Saudi Arabian government should also not be ignored.

Whether Aramco can practically sustain its huge dividend payments in the long term is a different question. Neil Beveridge, a Senior Oil and Gas Analyst, claims that oil prices will need to be above $50 for the company to fulfil its promise. Thankfully for Aramco, there are signs of the market recovering, as oil prices have recovered from a record low $16 a barrel in April to a now much healthier $40+. Demand is also rising in markets, with both China and Asia almost returning to pre COVID-19 levels, something which the CEO of Aramco has alluded to himself. Notwithstanding these signs of recovery, Aramco simply outshines its rivals. It has reserves that are some of the lowest cost oil sources in the world and, despite the pandemic, its share price remains higher than it was at its stock market debut back in December. In comparison, rivals have seen their share prices drop by 30-40%. If any oil giant can sustain its dividend payments, it’s certainly Aramco. 

Aramco’s 73% profit slump reflects a devastating year for oil markets and the global economy at large. For most companies, the next logical step would be to cut losses where they can, and the payment of shareholder dividends would arguably be one of the first avenues to turn. However, given Aramco’s Saudi state backing, a recovering oil market and its position as the second most valuable company in the world, sustaining dividend payments doesn’t seem like such an unattainable task.

Report written by Shea Brinsley

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