Aramco Promises Bumper Dividends but Investors Dwell on Governance and Valuation

Saudi Aramco is expected to publish its prospectus for its share sale on Saturday but investors continue to question how much the company is worth. Photo: maxim shemetov/Reuters

As Saudi Aramco gears up for what could be the world’s largest ever share sale, the company is trying to draw global investors with the promise of hefty dividends. But some investors are dwelling instead on what they perceive to be weak governance and a potentially high valuation.

Saudi Arabian Oil Co., as the company is formally known, has so far pledged an annual dividend of $75 billion for the first five years. The company’s IPO prospectus, due to be published later on Saturday, is expected to provide more information for investors who have largely struck a skeptical tone.

Some, like Dominic Bokor-Ingram, senior portfolio manager for frontier markets at Fiera Capital (Europe), are concerned that the $75 billion figure might have been chosen because it “sounds impressive,” without regard for the investment opportunities that the company could put cash toward instead.

“Is it because they think it’s a big number people should be very happy to get, or is that the number that optimizes the capital structure?” Mr. Bokor-Ingram said.

A spokesman for Aramco said the company’s board of directors steers its business affairs, providing management “with guidance in determining the company’s long-term strategy” as well as assessing the company’s opportunities and controlling its risks.

While the company is hoping for significant international investment, the kingdom is expected to require some members of the country’s elite, many of whom were arrested for alleged bribery in 2017 and held in Riyadh’s Ritz-Carlton luxury hotel, to buy stakes in the offering to help ensure the IPO’s success.

In recent weeks, Aramco has made a series of disclosures and efforts to draw global investors, which it hopes will account for about half the money raised.

The company has indicated that the promised $75 billion dividend is a starting point with potentially higher payouts ahead. At $75 billion, it is still five times Apple Inc. ’s payout for the 2019 fiscal year, the highest dividend of any S&P 500 company. And Aramco has promised nongovernment shareholders will get their pro rata share of the payout even if Aramco’s earnings don’t cover the government’s share as an investor. The company has framed the move as a signal minority shareholders will be treated fairly.

Aramco has also reduced the royalty rate it pays the government from 20% to 15% on sales of crude oil of up to $70 a barrel.

But as the company sends bank analysts and then top management to visit investors around the globe, these financial changes have done little to distract from pressing questions about the company’s expansion plans and its independence from the Saudi state.

A generous dividend payment can’t “reduce the question of governance,” according to Michel Wiskirski, a fund manager in the international equities team at Carmignac. The big question on investors’ minds is whether a “sensible chief executive” or the Saudi crown prince calls the shots at the company, he added.

The Aramco spokesman said the company “has a history of operating independently and has a clearly defined codified, rules-based relationship with its shareholder, the government.”

The process of canvassing investor interest over the next few weeks will determine how much of the company will be up for sale and at what price. But the crown prince, whose reputation hangs on the success of the long-delayed initial public offering, has previously indicated he wants the IPO to value Aramco at around $2 trillion.

Many international investors see that figure as ambitious. Analysts have put the company’s value at around $1.5 trillion, given the $75 billion of dividends being paid out and a 5% dividend yield, which analysts say is roughly typical for global oil giants. Royal Dutch Shell PLC has a dividend yield just over 6% and Chevron Corp oration just below 4%.

“You put a high number in everybody’s mind, so that when you come up with a $1.5 trillion valuation you give the impression that it’s a discount, although it was never going to be $2 trillion,” said Xavier Hovasse, head of emerging equities at Carmignac. The spokesman for Aramco declined to comment.

Nick Wilson, chairman of Gulf Investment Fund PLC, has already made the decision not to invest in the IPO. He sees the shares dropping sharply once they begin trading on the domestic Tadawul exchange, given the state is amping up demand for the shares among domestic investors and international banks leading the book-building process have created much fanfare around the IPO.

“Because of the pressure being put on so many parties to get it away—and at a good price—I’d be very surprised if it opened on the Tadawul at a premium to the IPO,” added Mr. Wilson.

The spokesman for Aramco declined to comment.

Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com

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