Global oil giant, “Aramco” (2222), plans to increase its dividends despite its intention to raise its debt, the company’s Chief Financial Officer, Ziad Al-Murshed, said in a recent interview with Bloomberg.
Details
Al-Murshed stated that Aramco would focus on achieving “value and growth” in dividends over the long term. The company plans to raise its debt levels instead of relying on equity.
He emphasized that this decision is unrelated to dividends, but rather concerns improving the capital structure to achieve the lowest possible average for the cost of capital.
He also mentioned that the company had been in a position where it did not need to turn to the markets for the past three years, but favorable market conditions drove it to make the move in 2024.
So what
Aramco resorted to the debt markets twice this year, issuing international bonds worth USD 6 billion in July, followed by shariah-complaint bonds (Sukuk) in September, after staying away from debt markets since 2021.
It is worth mentioning that the company is a key player in the Saudi economy, with its oil sales and generous dividends financing the massive spending plans led by Crown Prince Mohammed bin Salman, aiming to reduce the country’s dependence on oil.
However, the world’s largest oil exporter has been affected by a decline in oil prices this year.
Its production also reached “its lowest levels” in almost three years.
The Saudi government recently sold a stake in Aramco for USD 12.35 billion.
It remains the largest shareholder in the firm by a significant margin, helping to contain the Kingdom’s deficit.
Some context
Al-Murshed mentioned that the company raised its dividends by 4% over the past two years, bringing total base dividends to over USD 81 billion.
He also noted that they aim for a “gradual growth” in dividends in coming years, relying on free cash flows.
To grow its investor base, the company plans to issue debts regularly, but not in an excessively frequent manner.
The company has no plans to issue further debt for the rest of 2024.
Now what
Aramco’s dividends are expected to reach USD 124.3 billion this year, surpassing its profits.
This led to the company recording net debt in Q3 2024 for the first time since the same period in 2022, after having more than USD 27 billion in net cash a year ago.
The dividends are divided as follows: a quarterly base payment of USD 20.3 billion, covering about 95% of free cash flow, in addition to a performance-linked payment of USD 10.8 billion per quarter for the current year.
Al-Murshed explained that starting next year, the performance-linked part will be calculated as a percentage of the remaining free cash flow after base dividends and investments.
It is worth mentioning that the company’s leverage ratio, represented by the debt-to-equity ratio of around 2%, is considered low compared to its competitors.
‘The company isn’t targeting a specific ratio. You’ll see our gearing ratio go up and come down across the cycles,’ Al-Murshed said.
