It’s time for an update on Petrobras’ dividend policy! The management has made significant changes to how dividends will be handled going forward. They’ve decided to limit the quarterly dividend to 45% of its free cash flow (FCF), a stricter requirement than before. Previously, the guidance was to pay out 60% of operational cash flow minus investments when the total debt was below $65 billion.
To add more flexibility to their capital allocation priorities, Petrobras will also use share buybacks as an alternative way to reward shareholders. This decision comes as the company plans to invest further in renewable energy to sustain its long-term business model.
These changes were already hinted at by CEO Jean Paul Prates, who advised investors to anticipate a shift in Petrobras’ dividend policy. He also made it clear that the substantial payouts received in 2022, reaching $42.6 billion, are unlikely to be repeated. CFO Sergio Caetano also emphasized that the new dividend policy will be adjusted to reflect the company’s focus on future investments.
To align with these new developments, it’s essential for PBR investors to assess whether the market has factored in these changes in its current valuation. Petrobras posted an FCF of $38.9 billion in FY22, with a dividend per share of $5.80, resulting in a free cash flow payout ratio of 93.3%. With the revised dividend policy, such a high payout structure will no longer be feasible, given the expected investments in renewable energy projects.
Analysts’ estimates suggest that Petrobras’ near-term FCF will decrease significantly, projecting $24.7 billion in FY23 and $15.8 billion in FY24. This reduction implies a considerable decrease in dividends per share moving ahead. On a per-share basis, assuming no share buyback, Petrobras’ FCF is expected to fall to $3.94 in FY23 and $2.52 in FY24. Based on a 45% payout ratio, investors should not expect a dividend of more than $1.77 in FY23 and $1.13 in FY24.
However, analysts’ dividend per share estimates are somewhat optimistic, as they didn’t anticipate such a significant markdown in management’s guidance. They expect a dividend per share of $2.21 (25% higher) for FY23 and $1.48 (31% higher) for FY24. Nevertheless, PBR’s current forward dividend yield of 14.6% indicates that the market has likely priced in a dividend cut, remaining above its 10-year average of 7.1%.
The key question now is whether the revised dividend payout with buybacks is sufficient to satisfy investors. Looking at PBR’s price chart, investors were anticipating a more significant revision than analysts had projected, with the stock’s upward recovery stalling at the $15 zone. However, there wasn’t enough selling pressure to push it back to its December 2022 lows after a strong breakout in June, indicating a bullish bias.
For those considering adding more shares, it’s essential to monitor PBR’s next pullback and gauge the strength of buying support, which might find a bottom around the $12 zone. Considering its attractive valuation and positive price action, the overall sentiment is becoming more constructive on PBR. In my opinion, maintain hold for now.
