Why Saudi Aramco stock is a tough sell on Wall Street

livemint.com:

Saudi Aramco’s generous dividends can only go so far in making up for an overpriced initial public offering. The Saudi Arabian national oil company will sell shares worth up to $12 billion in an offering this week. The Saudi government, which will still own more than 80% of Aramco at the end of the sale, will use the proceeds to fund the country’s cash-hungry Vision 2030 initiatives.

Projects designed to help diversify the Saudi economy away from oil, such as futuristic desert city Neom, haven’t attracted the flood of foreign capital Riyadh expected. When Aramco went public in December 2019, investors in New York and London mostly stayed away. At $1.7 trillion, the price was high and they could find better value elsewhere.

At the time, Shell and BP offered a 6%-plus dividend yield, compared with Aramco’s 3.85%. Tepid demand meant plans for a dual listing on a major international exchange were abandoned. Foreign investors ended up buying only 15% of the $29.4 billion IPO on Saudi’s domestic bourse.

A third of the offer went to local retail investors who received perks such as one bonus share for every 10 they held for at least 180 days. Local retail shareholders will be allocated just a tenth of the latest offer. Aramco is hoping a beefed-up dividend will be enough to lure international funds this time round.

After introducing a new performance-based payout last year, the company currently has a dividend yield of 6.2%, better than those of Chevron or Exxon Mobil. However, Aramco still looks a lot more expensive than Western supermajors on other metrics, such as price-earnings multiples and free cash flow yields. This valuation premium could hold back returns, just as it has since the IPO.