Aramco's Dividend Dilemma: Can the Saudi Giant Afford to Keep Paying?

As the world's most profitable company, Saudi Aramco has been a cash cow for the Saudi government, funding its ambitious spending plans and helping to balance its budget. However, with oil prices remaining subdued and production levels near three-year lows, Aramco faces a challenging decision: maintain its generous dividend payouts or risk exacerbating the kingdom's budget deficit. JPMorgan analysts have predicted that Aramco will not pay a special dividend this year, raising questions about the company's future dividend strategy.

Aramco's dividend payouts have been a significant source of revenue for the Saudi government, helping to fund Crown Prince Mohammed Bin Salman's multitrillion-dollar spending plans. The company's total dividends in 2023 reached SAR 410 billion, with a share dividend of SAR 1.68. However, the weak outlook for oil prices and production levels has put increasing stress on Aramco's balance sheet, with the company flipping into a net debt position in the third quarter of 2023.

Aramco's gearing ratio, net debt to equity, stood at about 2% in the third quarter of 2023, which is low compared to other global oil majors. However, the company's net debt of $8.9 billion is a significant increase from the $27 billion in net cash it had just a year ago. Aramco has been borrowing to maintain its dividend payouts, but this strategy may not be sustainable in the long term.

Aramco's dividend is made up of two parts: a base payment and a performance-linked portion. The base payment consumes about 95% of free cash flow, while the performance-linked portion is set to be paid as a percentage of free cash flow starting next year. The special dividend, initially based on the huge profits from oil's boom following Russia's invasion of Ukraine, is set to be paid as a percentage of free cash flow starting next year. However, with oil prices remaining subdued and production levels near three-year lows, Aramco may struggle to maintain the special dividend without further increasing its leverage.

Aramco's payout on earnings in 2023 was 47.98%, which is higher than the market average and the average of the Oil and Gas industry. The company's payout on cash flow was also higher than its earnings payout, indicating that Aramco generates enough cash to maintain its dividend in the future. However, the company's high dividend payout ratios may not be sustainable in the long term, especially if oil prices remain subdued and production levels stay near the lowest levels in three years.

In conclusion, Aramco faces a challenging decision: maintain its generous dividend payouts or risk exacerbating the kingdom's budget deficit. JPMorgan's prediction that Aramco will not pay a special dividend this year suggests that the company may be prioritizing its balance sheet and long-term sustainability over short-term shareholder returns. However, the company's future dividend decisions will depend on various factors, including oil prices, production levels, and the kingdom's budget situation. If these factors improve, Aramco may be able to resume paying special dividends in the future.