Petrobras: The Dividend Is Finally Cut, Here's What To Expect Next (NYSE:PBR) - Seeking Alpha

Petrobras: The Dividend Is Finally Cut, Here's What To Expect Next (NYSE:PBR) | Seeking Alpha

Petrobras: The Dividend Is Finally Cut, Here's What To Expect Next
Petróleo Brasileiro S.A. - Petrobras (PBR) PBR.A 77 Comments

Summary

- Petrobras has revised its dividend policy, a significant downgrade from last year's substantial payouts. The revised guidance is also more substantial than what analysts projected.
- While the revision isn't unexpected, the more than expected revision could compel some income investors to bail out, as they worry about a downward de-rating in its valuation.
- Despite that, PBR last traded at an attractive valuation, suggesting that the market has likely reflected a dividend cut. Also, its price action is constructive, improving buying sentiments.
- I assessed while the cut could lead to near-term volatility, PBR is close to another buy point, as I point out the key levels to watch in the article.
- Looking for a helping hand in the market? Members of Ultimate Growth Investing get exclusive ideas and guidance to navigate any climate. Learn More »

caio acquesta

The day of reckoning has finally arrived as Petróleo Brasileiro S.A., or Petrobras (NYSE: PBR) management updated investors about its revised dividend policy. Accordingly, management announced Petrobras' quarterly dividend would be limited to 45% of its free cash flow or FCF. It's a more stringent requirement from the previous guidance of "60% of operational cash flow minus investments when total debt was below $65 billion." In addition, the company indicates that it would leverage "share buybacks as an alternative way to reward shareholders," providing the company with more flexibility in its capital allocation priorities.

However, management has already provided ample warning about the revisions to its dividends over the past month. Therefore, income investors who stayed on board have likely anticipated significant changes to the company's dividend policy. CEO Jean Paul Prates updated in mid-July that Petrobras investors " should anticipate a change in Petrobras' dividend policy." Notably, the company has to make these changes to "align with its strategic investment in future growth," as Petrobras expects to invest further into renewable energy to sustain its long-term business model.

Prates also implied in his commentary that investors shouldn't expect the substantial payouts they received in 2022, reaching $$42.6B. He emphasized that "the size of dividend payments is likely to be different from the significant payments enjoyed by investors in the previous year."

CFO Sergio Caetano also reminded investors that the " new dividend policy would be 'adjusted' to reflect the company's focus on future investments." As such, I believe it's timely for PBR investors to assess whether the market has reflected these changes in its current valuation.

Petrobras posted an FCF of $38.9B in FY22, or $6.21 per share. However, the company paid out a dividend per share of $5.80 based on data from S&P Cap IQ, indicating a free cash flow payout ratio of 93.3%. Therefore, the revised dividend policy suggests that such a payout structure will no longer be possible, which is sensible. Petrobras is expected to commit investments into renewable energy projects, which is unlikely to have near-term FCF accretion.

Analysts' estimates (generally bullish bias) suggest that Petrobras could post an FCF of $24.7B in FY23 and $15.8B in FY24, a significant reduction from FY22's $39B. As such, Petrobras' near-term FCF has likely peaked, suggesting that income investors must be prepared for a considerable decrease in dividends per share moving ahead.

On a per-share basis (assuming no share buyback through the forecast period), Petrobras' free cash flow per share 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 on Petrobras are too bullish, as they likely didn't anticipate such a significant markdown in management's guidance.

Accordingly, analysts penciled in a dividend per share of $2.21 (25% higher) for FY23 and $1.48 (31% higher) for FY24. With that in mind, PBR, which last traded at a forward dividend yield of 14.6% (based on S&P Cap IQ data), implies that the market has likely priced in a cut in its dividend, as it remains well above its 10Y average of 7.1%.

Therefore, the critical question is whether the revised dividend payout with buybacks is sufficient to placate investors?

PBR price chart (weekly) (TradingView)

As seen above, investors likely anticipated a more significant revision than the analysts had projected, as PBR's upward recovery stalled at the $15 zone.

However, I assessed that sellers didn't have sufficient momentum to force it down back toward its December 2022 lows after June's remarkable breakout. As such, it indicates that PBR seems to have recovered its bullish bias.

Therefore, investors considering adding more shares should assess PBR's next pullback (hopefully from income investors rushing out with the revised policy) and gauge the strength of its buying support, which could bottom out at the $12 zone.

Given its attractive valuation (rated "A+" by Seeking Alpha Quant) and more constructive price action, I'm turning increasingly constructive on PBR.

Rating: Maintain Hold (On the watch for a rating change).

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Want To Hear From You

Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

A Unique Price Action-based Growth Investing Service

- We believe price action is a leading indicator.
- We called the TSLA top in late 2021.
- We then picked TSLA's bottom in December 2022.
- We updated members that the NASDAQ had long-term bearish price action signals in November 2021.
- We told members that the S&P 500 likely bottomed in October 2022.
- Members navigated the turning points of the market confidently in our service.
- Members tuned out the noise in the financial media and focused on what really matters: Price Action.

Sign up now for a Risk-Free 14-Day free trial!

This article was written by
Ultimate Growth Investing

Ultimate Growth Investing, led by founder JR Wang of JR Research, helps investors better understand a range of investment sectors with a focus on technology. JR specializes in growth investments, utilizing a price action-based approach backed by actionable fundamental analysis. With a powerful toolkit, JR also provides insights into market sentiments, generating actionable market-leading indicators. In addition to tech and growth, JR also offers general stock analysis across a wide range of sectors and industries, with short- to medium-term stock analysis that includes a combination of long and short setups. Join the community today to improve your investment strategy and start experiencing the quality of our service.

Seeking Alpha features JR Research as one of its Top Analysts to Follow for the Technology, Software, and the Internet category, as well as for the Growth and GARP categories.

JR Research was featured as one of Seeking Alpha's leading contributors in 2022.

About JR: He was previously an Executive Director with a global financial services corporation and led company-wide, award-winning wealth management teams consistently ranked among the best in the company. He graduated with an Economics Degree from Asia's top-ranked National University of Singapore (NUS). NUS is also ranked among the top ten universities globally. I currently hold the rank of Major as a Commissioned Officer (Reservist) with the Singapore Armed Forces.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.