Saudi Aramco’s financial results for the first half of 2024 highlight the impact that higher dividend payments are having on its balance sheet and raise questions about whether dividends can be sustained at current levels.

Aramco introduced a new performance-linked dividend in the third quarter of 2023. This is in addition to the usual base dividend the company has paid since 2018. The performance-linked dividend is set at 70% of Aramco’s “free cash flow” (defined as the cash flow from operations after capital expenditures and base dividend payments) in 2022 and 2023 and is to be paid on a quarterly basis through the fourth quarter of 2024. Dividend payments are expected to be $124 billion in 2024 compared to $98 billion in 2023 (and $75 billion in 2022). What will happen in 2025 and beyond is unclear.

The higher dividend payout is good news for the government and Public Investment Fund, the company’s two largest shareholders. Both need funds to cover growing spending commitments in pursuit of the Vision 2030 reforms.

Is the High Dividend Sustainable?

Cash from Aramco’s operating activities declined by nearly 12% in the first half of 2024 relative to the first half of 2023 as lower oil production more than offset higher oil prices. Despite this, capital investments and dividend payments increased, resulting in a $28 billion drawdown in liquid assets (defined as cash and short-term investments).

At $74 billion, liquid assets are still at comfortable levels, but the rate at which they are declining (from $135 billion at the end of 2022) suggests that it will be difficult to sustain the dividend at current levels in the absence of a strong rebound in oil revenue. Additional borrowing, further asset disposals, or a reduction in capital spending could help sustain the high dividend for some period, but none are longer-term solutions.

It is unclear how Aramco plans to proceed with its dividend policy in 2025 and beyond. Aramco President and CEO Amin Nasser wrote in the financial report that “we continued to deliver a base dividend that is sustainable and progressive, and a performance-linked dividend that shares the upside with our shareholders.” The performance-linked dividend may remain in 2025 but perhaps at a lower level that reflects the less favorable oil market environment the company is experiencing compared to 2022.

Any reduction in Aramco’s dividend will have implications for the government budget and PIF. To cover any drop in the dividend, either new sources of revenue will need to be found, spending plans adjusted, or borrowing increased.