Saudi Aramco faces pressure to cut dividends amid sluggish oil prices

Saudi Aramco, the world’s largest oil company, has long been a symbol of financial strength, offering generous dividends to both local and international investors.

If something can't continue indefinitely, it eventually comes to an end — and Saudi Aramco, the world's largest oil company, is no exception. Despite its staggering $1.5 trillion market value, the company faces mounting pressure as oil prices hover around $75 per barrel and OPEC+ production cuts limit output. As a result, Aramco is likely unable to maintain its full dividend payout for much longer, and a reduction seems imminent, Caliber.Az reports, citing foreign media.

So far this year, Aramco has distributed $93.2 billion in dividends, funded by borrowing, as its free cash flow reached only $63.7 billion. To put it simply, the company has been spending over $100 million every day just to sustain its shareholder payouts. Even with Aramco's robust balance sheet, this level of spending is unsustainable. The expected cut is particularly significant for the Saudi government, which controls about 97 per cent of Aramco's equity and relies on the company's dividends to support its lavish spending.

The reduction is also noteworthy for the handful of international investors attracted by Aramco's promise of substantial payouts. In some respects, the reduction is a natural outcome. Aramco typically pays two types of dividends: a base dividend of just over $20 billion each quarter, plus a "performance-linked" dividend close to $11 billion. 

When Aramco introduced the performance-linked payout in mid-2023, driven by soaring oil prices after Russia's invasion of Ukraine, it indicated that these performance payouts would last for six quarters. If Aramco sticks to that plan, the sixth and final payout would likely be made in the current fourth quarter. The Saudi government has relied on Aramco's large dividends to attract investors, hoping to periodically sell off small portions of the company. After the initial public offering (IPO) in late 2019, Riyadh followed up with a secondary offering in June.

Unlike many other major oil companies, however, buybacks—typically used to return excess capital to shareholders—are not an option for Riyadh, as they would reduce the stock's already limited free float. The extra dividend served to make Aramco more attractive during the second share sale. At current market levels, the company boasts an unusually high dividend yield of over 7 per cent, far surpassing ExxonMobil and Chevron, which offer yields in the 3.5 per cent to 4.5 per cent range. However, even with such a generous payout, few investors have been enticed. Aramco's stock has underperformed this year, trailing even underperforming bp. 

Should Aramco need to significantly cut its total dividend in 2025, its stock performance is likely to worsen further. Based on the company's most recent quarterly earnings report, it seems unlikely that Aramco will be able to continue its performance-linked payouts. When the extra dividends were introduced, Aramco indicated that it aimed to return 50 per cent to 70 per cent of its annual free cash flow to shareholders, after accounting for the base dividend and other expenses. But now, free cash flow barely covers the base dividend. In Q3, Aramco reported nearly $22 billion in free cash flow, with the base dividend standing at $20.3 billion. 

By Naila Huseynova