In a bid to attract new investors, Saudi Arabian oil giant Saudi Aramco is highlighting its hefty dividend payout as a key selling point. The company is planning to sell additional shares, potentially raising $12 billion. Investors who are willing to overlook a somewhat high valuation and the absence of stock buybacks would be entitled to a slice of Aramco's $124 billion annual dividend payout. According to Bloomberg Intelligence, this translates to a dividend yield of 6. 6%, making it one of the most attractive payouts in the oil industry.
A large portion of these dividends will flow to Aramco's biggest shareholder, the Saudi government, which is using the funds to finance a significant economic diversification plan. The share offering, one of the biggest globally in recent years, will be a test of international investors' interest after they largely sat out Aramco's initial public offering (IPO) in 2019.
While some analysts view Aramco's stock as a long-term investment opportunity, particularly appealing to institutional investors seeking steady dividend income, there are also potential drawbacks that could deter some investors. Unlike many of its global counterparts, Aramco does not currently engage in share buybacks, which can be a way for companies to boost their stock price. Additionally, Aramco's shares are priced at a premium of more than 75% compared to the European benchmark for oil and gas companies. This premium exists even after a recent decline of around 17% in Aramco's share price since its annual high in August 2023. The decline is likely due to a combination of factors, including investor uncertainty surrounding the details of the secondary offering and the future of OPEC+ production cuts.
However, potential investors entering the market at the lower end of the proposed price range could benefit from a discount of up to 7. 9% compared to Aramco's closing share price on Thursday. This has led some analysts to argue that the current offering presents a more attractive entry point, with a more favorable valuation of around 16 times price-to-earnings ratio.
Aramco is likely to target foreign institutional investors who are bullish on future oil price increases over the next two to three years. The company's status as the world's largest oil producer by oil reserves, coupled with its healthy dividend yield, could prove to be a tempting proposition for investors seeking exposure to the oil market. However, the success of Aramco's share offering will depend on whether investors are willing to overlook the premium valuation and the absence of stock buybacks in order to secure a share of the company's substantial dividend payout.