Aramco's dividends: a key part of Saudi Arabia's financial strategy

Saudi oil company Aramco is at the centre of the kingdom's economic strategy, with dividends playing a crucial role in financing public spending. With the imminent publication of its financial results for 2024, attention is focused on how it will modify its annual dividend of $124 billion and the impact of this decision on the country's economy. 


Aramco is expected to announce fourth-quarter dividends of $31.1 billion, which would maintain the level of payments observed throughout the year. This would represent 34% of government spending in 2023, a year in which the deficit reached 30.73 billion dollars. However, analysts warn that the company could be paying out more than it earns, with a dividend payout ratio that would reach 110% if quarterly results are in line with the first nine months of 2024. 


The main dilemma lies in two options: maintaining the high dividends and absorbing the impact on its financial balance sheet or reducing them, which could widen the country's budget deficit. In 2023, Aramco introduced additional performance-linked dividends, a strategy that could now be revised to ease financial pressures. 

Impact on the Saudi economy and the bond market 

The importance of Aramco goes beyond dividends. Bloomberg highlights that the decision on payments could affect Saudi Arabia's ability to issue sovereign bonds, a key mechanism for financing its economic transformation plan. In 2024, the Saudi government has already issued $15 billion in bonds, making it the largest debt issuer among emerging economies. 


Despite the fall in oil revenues, Riyadh continues to make progress with its development plan, with project contracts valued at 146 billion dollars last year. However, the reduction in crude oil production and the fall in oil prices could affect the sustainability of this approach. In January, the International Monetary Fund adjusted its growth forecast for Saudi Arabia, reducing the forecast for 2025 from 4.6% to 3.3%.

Outlook and possible solutions 

Analysts Justin Alexander and Vijay Valecha agree that Aramco could eliminate its performance-linked dividend, a move that would reduce the pressure on its balance sheet, but could also affect investor confidence. Alternatively, the Saudi government could resort to more borrowing or consider selling a third stake in Aramco, as it did in 2023 to raise $12 billion. 


However, reducing dividends could affect the company's attractiveness on the stock market. Aramco currently offers a dividend yield of 7.1%, higher than that of the major oil companies in Europe and the United States, but below that of companies such as Petrobras and the main Chinese oil companies. 

Aramco's financial future and its role in the Saudi economy remain uncertain. The decision on dividends will be crucial for the country's fiscal stability and its ability to finance strategic projects in a context of volatility in oil prices and changes in production. Attention will be focused on the results, which could mark a turning point in the kingdom's economic strategy.