Bankers for Saudi Aramco’s initial public offering have dangled the possibility of bonus payouts that could take the company’s annual dividend past $100bn in an effort to woo investors for a flotation tipped to be the biggest ever.
The banks charged with launching the listing have been told that shareholder payouts could be far greater than the promised minimum annual dividend of $75bn during the next five years.
“Aramco management has stressed the possibility of additional distributions to shareholders above and beyond the minimum dividend pledge,” Bank of America Merrill Lynch said in a report for investors seen by the Financial Times.
The BofA report — reflecting the messaging by Saudi officials — is one of several by global banks hired to drum up interest in a flotation that could happen as early as next month.
It sets out how higher oil prices, rising free cash flow and borrowing towards the company’s self-imposed limits could make additional payouts possible. The dividend would also grow in line with Saudi inflation or economic growth, which BofA forecast at 3 per cent a year.
BofA, which values the company between $1.2tn and $2.3tn, said that, with an oil price of $60 a barrel, the additional dividend between 2020 and 2023 could average as much as $11.5bn a year, giving an annual total of $86.5bn.
If oil averaged $70 a barrel over the next four years, the extra $18bn of free cash flow would allow the additional annual dividend payment to reach $30bn, meaning a total payout of $105bn.
Brent crude hovered around $62 a barrel on Thursday and there is some concern that investors might balk at what some people regard as overly optimistic oil-market scenarios.
One analyst said the prospect of $70-a-barrel oil was unlikely and investors should consider the implications of oil falling to $50 a barrel or lower. “This is marketing material,” said another banker.
Saudi Aramco has in recent weeks said that if, during the next five years, the company fell short of the minimum payout, dividends to non-government shareholders would be prioritised so they receive a pro-rata share of a $75bn equivalent dividend.
Saudi Aramco has a self-imposed gearing target of 15 per cent, which gives it room to increase borrowing. But analysts have questioned the implications for the dividend should oil prices slide, forcing the Saudi-led Opec oil cartel to cut production drastically.
The emphasis on payouts that far exceed other listed oil and gas companies comes as Riyadh seeks to secure the highest possible valuation for the company. The kingdom has also changed royalty rates and cut corporate tax, while Saudi Aramco has curbed its longer-term capital spending.
Royal Dutch Shell’s annual dividend, the world’s biggest
Until now, Royal Dutch Shell has been the world’s biggest dividend payer, handing out almost $16bn in 2018. ExxonMobil came in second paying $13.8bn while technology company Apple paid $13.7bn.
Saudi Aramco, which made a net income of $111bn in 2018, is eyeing a listing of 1 per cent to 3 per cent of the company on Riyadh’s Tadawul exchange, which would raise $20bn to $60bn at a $2tn valuation.
People close to the process say Crown Prince Mohammed bin Salman has tempered his expectations for a $2tn valuation, believing that a successful IPO is more important than hitting his target.
While domestic demand for the offering has been strong, with many wealthy Saudis being pressured by the state to invest, some foreign institutions have given it a cool reception. Many overseas investors have been arguing for a $1.2tn-$1.5tn valuation.
The focus on dividends also comes because those working on the IPO are pitching the Saudi Aramco share sale more like a bond. Saudi Aramco’s debut bond was oversubscribed in April, generating a yield of 3.1 per cent.
BofA gives a 2020 dividend yield range from 3.6 per cent at a $2.1tn valuation, to 6.7 per cent at a $1.1tn valuation, compared with an average yield of 4 per cent for US oil companies and 6.4 per cent for European majors.
Boosting dividend returns would help ameliorate investor concerns over governance, state interference in the country’s main revenue earner, and the security of energy assets after attacks on oil infrastructure.
Saudi Aramco and Bank of America declined to comment.
Additional reporting by Laura Noonan
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