DUBAI (Reuters) – Saudi Arabia’s plan to push its top companies to invest $1.33 trillion in the kingdom by 2030 by cutting dividends may accelerate economic diversification efforts but could also risk dimming the allure of local stocks for investors.
Crown Prince Mohammed bin Salman said on Tuesday that oil firm Saudi Aramco and petrochemical firm SABIC would account for 60% of the investment, and mentioned as other big players in the programme Saudi Telecom, dairy products firm Almarai and National Shipping Co (NSC).
“This is largely about the government shifting capital from one part of its portfolio to another for projects that may not pass the hurdle rate for required returns for a truly autonomous private sector,” said Hasnain Malik, head of equity strategy at Tellimer.
The government owns 98% of Aramco, which listed on the local bourse in 2019. Prince Mohammed said dividends for those who own shares in Aramco would remain stable.
Aramco holds a 70% stake in Saudi Basic Industries Corp (SABIC), while sovereign wealth fund the Public Investment Fund (PIF) owns 70% of STC. PIF and the government together own more than 40% of NSC. A PIF unit has a 16.32% stake in Almarai.
Prince Mohammed has said stakeholders would benefit from growth in the 24 firms participating in the voluntary programme which aims to help rid the economy of its reliance on oil exports and create new sectors to reduce unemployment among Saudis, which stood at 12.6% at the end of 2020.
State spending remains Saudi’s economic engine as large foreign capital inflows have yet to materialise.
Malik and other analysts said the plan may take away part of the allure of Saudi Arabia’s stock market, where dividend yields are a strong factor for investors along with oil prices.
Companies listed on main the Saudi stock exchange Tadawul, which according to EFG Hermes paid 313 billion riyals ($84 billion) in dividends last year, have an average dividend yield of 2.8%. Aramco is higher at 4%.
“The vast majority of activity in the Saudi market (>85%) is driven by Saudi retail investors,” said Khaled Abdel Majeed, MENA fund manager at London-based SAM Capital Partners.
“These investors are by and large unsophisticated and driven by dividend yields. Reduce these yields and the market is likely to weaken. The yield now is in the range of 2-2.5% for the market as a whole so not much room for manoeuvre.”
Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital in Abu Dhabi said the plan revives questions about minority shareholders’ rights and voices in the decision-making of listed companies in which the government owns a majority.
“It also makes investments in those participating companies more like private equity investments over 5-7 years rather than a public equity investment, as the returns will rely on exit strategy after many years rather than annual or shorter exits if needed,” Yassin said.
The kingdom has introduced a raft of reforms to attract overseas share buyers to Tadawul, which opened to foreign investors in 2015. The stock index was up 1.8% in afternoon trade amid rising oil prices.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said current oil prices give Aramco room to cut its dividend to the government – $75 billion last year – but would face problems should oil prices come under pressure again.
The government said it would offer participating firms regulatory reform, subsidies and soft loans from development institutions, among other incentives.
“The authorities are taking the longer view even if lower dividends hinder income in the short-term,” said Maya Senussi, senior economist at Oxford Economics. ($1 = 3.7503 riyals)
Reporting by Yousef Saba and Saeed Azhar; Additional reporting by Hadeel Al Sayegh; Editing by Alex Richardson