Petrobras: This Is Why Dividends Will Be Smaller And Smaller

Petrobras, Brazil’s state-controlled oil giant, has long been a cornerstone of the country’s economy—and a favorite among income-seeking investors. Yet, a perfect storm of financial strain, strategic shifts, and external pressures is now casting doubt on its ability to sustain dividend payouts at previous levels. This article explores why Petrobras’ dividends are shrinking and why the trend is likely to continue.

The Financial Decline: Profits Plunge, Debt Rises

Petrobras’ profitability has collapsed in recent years, driven by a combination of macroeconomic headwinds and poor financial decisions. In 2024, net profits plummeted to $7.5 billion, a staggering 70% drop from the $25 billion recorded in 2023. The key culprits:

1. Currency Volatility: A $10.9 billion loss stemmed from the Brazilian real’s depreciation against the U.S. dollar, exacerbating debt servicing costs for its dollar-denominated liabilities.
2. Oil Price Slump: Falling Brent prices and narrowing diesel crack spreads cost the company $6.5 billion.
3. Government Mandates: A $2.7 billion “federal tax transaction” further eroded profits.

These factors, combined with a 9.5% year-on-year drop in sales revenue, have left Petrobras scrambling to stabilize its finances.

Dividend Policy: Constraints from Debt and Strategy

Petrobras’ dividend policy, revised in 2023, mandates a minimum payout of 25% of profits, with an optional 45% of free cash flow distribution only if gross debt remains below $60 billion. However, in 2024, gross debt surged to $60.31 billion, exceeding the threshold and limiting flexibility.

The result? Dividend yields have fallen sharply, dropping to ~10% in 2025 from a peak of 15% in 2023. Even more concerning, the company’s 2025–2029 strategic plan prioritizes capital expenditures (capex), allocating 70% of investments to exploration, production, and renewables, diverting funds away from shareholder returns.

Strategic Shifts: Growth vs. Shareholder Value

Petrobras is doubling down on long-term growth, particularly in its Búzios field—Brazil’s largest pre-salt oil reserve. The recent launch of the Almirante Tamandaré FPSO has boosted production capacity to 225,000 barrels per day (bpd), with ambitions to reach 2 million bpd by 2030. While this could stabilize cash flows, the upfront costs are immense.

The company’s 2025 capex budget is $14.5 billion, up 25% from 2024, with renewables and exploration taking precedence. This shift means fewer funds are available for dividends, even as profits remain volatile.

Government Influence: A Double-Edged Sword

As a state-owned enterprise, Petrobras operates under political pressures. The Lula administration has pushed for lower dividend payouts to redirect capital into state-backed projects, such as refineries and infrastructure.

Moreover, the government’s intervention in pricing strategies—moving away from international benchmarks to discretionary pricing—has raised concerns about Petrobras absorbing cost pressures instead of passing them to consumers. Political instability is further highlighted by six CEO changes in three years, reflecting governance challenges.

Valuation and Risks: A “Value Trap”?

Petrobras trades at a steep discount compared to global peers like ExxonMobil (XOM) and Shell (SHEL), with a forward P/E of 3.6–4.6x versus ~10x for international majors. While its dividend yield remains high, it has trended downward from mid-teens levels.

Analysts at Zacks Investment Research rate Petrobras a #3 (Hold), citing risks like currency volatility, political interference, and macroeconomic uncertainty. Long-term production growth offers upside, but near-term returns hinge on oil prices and fiscal policy stability.

Conclusion: A Perfect Storm for Dividend Investors

The evidence is clear: Petrobras’ dividends will continue shrinking due to a trifecta of challenges—financial fragility, strategic reinvestment, and political interference. Key data points underscore this reality:

• Debt: Gross debt exceeding $60 billion has locked out the optional 45% free cash flow dividend tier.
• Capex: 70% of investments are redirected toward growth, leaving less for shareholders.
• Oil Prices: The EIA forecasts flat-to-declining oil prices in 2025, squeezing margins further.
• Governance: Political instability and shifting priorities erode investor confidence.

While production milestones like Búzios’ expansion offer a glimmer of hope, the near-term outlook remains grim. For income investors, Petrobras is increasingly a “value trap”—appealing on paper but risky in practice. The dividend yield, now below 10%, may continue its downward trajectory unless oil prices rebound sharply or the government relents on its fiscal demands.

In the words of analyst Felipe Salto, “Petrobras’ payouts depend on oil prices and should not form the core of fiscal policy.” For now, investors would be wise to treat this once-reliable dividend machine with caution.