How Sustainable Are Big Oil Dividends?
- The O&G industry uses dividends and share buybacks to signal financial stability and attract investors.
- Record profits from rising oil prices, especially post-Ukraine invasion, have been criticized for benefiting from global crises while the industry invests minimally in renewable energy.
- The “New Energy Trilemma” highlights the industry’s struggle between prioritizing dividends, fossil fuel investment, and renewable energy.
The dividend payout has long been considered a corporate policy commonly used to send signals to the market. According to signaling theory, companies tend to pay dividends to convey a positive message to investors about profits and cash flow. The O&G industry is known for maintaining a stable dividend payout, increasing dividends when companies decide they also need to boost the share price and, therefore, the company’s value. Some analysts argue that an increase in dividend payments encourages pension funds to own more energy stocks. However, the industry is currently under significant pressure from both the market and society, which is pushing for divestment due to concerns over environmental impact and the energy transition. O&G companies are returning more money to investors than ever before, through both dividend payments and share buybacks, in an effort to restore investor confidence and address the uncertain future of the industry. O&G executives have indicated that profit-sharing is preferable to increased production, as investors favor immediate returns over long-term investments in mega-projects that take years to yield profits.
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Note: Own elaboration based on the data provided by the Eikon Refinitiv by Thomson Reuters database.
Another reason why O&G companies have set record dividend payouts in recent years is because of the uncertainty in the sector due to the energy transition that causes the assets and businesses they currently have in their portfolio to lose value over time. Large oil companies are returning as much as possible to investors so that they do not leave for other sectors or companies. According to Mike Wirth, CEO of Chevron, “During a time of geopolitical turmoil and economic uncertainty, our objective remained unchanged: safely deliver higher returns and lower carbon.” This position has been strongly criticised by some environmental groups, indicating that the significant amount of dividend payouts by these companies is a strategy to distract the investor and try to hide the risk of an imminent energy transition.