Treasure Chest: Woodside’s Dividend Enigma

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Greg Peel

Whose Idea Is It?

Jarden

The subject:

Woodside Energy ((WDS))

More info:

This morning Woodside Energy went ex a dividend of US144c fully-franked which suggests a gross yield (including franking) of 8%.

When Woodside reported its 2022 earnings result last month, brokers agreed this would be the last of the super-dividends, reflective of sky-high LNG prices brought about by the war, that we will see from here.

The earnings result itself was a messy affair, featuring higher than expected costs in areas such as royalties and hedging, but with the important numbers having been flagged at the company’s earlier production report release, brokers were not much fussed. All focus was on dividend policy going forward.

Brokers agreed that from here on, Woodside would pay dividends based on an 80% payout ratio, which is actually the top of management’s target range.

Citi noted the company appears to be taking a more conservative view on its balance sheet, paying lower dividends in the foreseeable future, evident in depreciation methodology changes which are not offset by a higher payout ratio.

Earlier this week Jarden noted the single largest factor impacting Woodside’s 2023 dividend outlook was a release on February 14 detailing 2022 financial line-item guidance. This outlined a change in the company's depreciation policy, which in effect resulted in a material increase in the depreciation rate for non-LNG assets.

While the announcement focused on the 2022 year, management felt compelled, Jarden suggests, to release indicative 2023 depreciation expense guidance of some -US$4.4bn, well ahead of consensus at the time of -US$3.1bn. The consensus dividend forecast fell to US157c following that release and has remained at this level since that date, despite Woodside announcing its 2022 full-year results on February 27.

Jarden is forecasting US142c, or some -10% below consensus.

This forecast is based on Jarden's forecast realised gas-hub price of US$25/mmbtu in 2023. Woodside sells up to 25% of its equity LNG production at gas hub (spot LNG and European gas-linked) prices. Since Woodside last provided 2023 cash flow guidance back in November, spot LNG and European gas prices have declined by -41% and -59% respectively, due primarily to a warmer than forecast European winter.

2023 average spot currently sits at US$16.0/mmbtu and Europe at US$15.4/mmbtu. At these average prices, Jarden’s forecast dividend (based on an 80% payout ratio) is US107c.

“Higher expenses and lower gas prices have slashed our forecast WDS 2023 dividend at forward curves to [US] 107cps, -48% below the 16 January consensus of [US] 205cps,” notes Jarden. “Yet the WDS share price is now trading at a higher level than it was seven weeks ago. Why is the market ignoring this material cut in dividend expectations?”

Jarden concludes that while the majority of sell-side (stockbroker) analysts use discounted cash flow analysis to value Woodside (completely ignoring the impact of dividends), its own view is that the market will start to focus on 2023 dividends after the stock goes ex-dividend today.

To that end we note (at the time of writing) that Woodside’s share price is down -7.7% (inclusive of the dividend), but also that oil prices fell close to -4% last night (peer Santos ((STO)) is down -1%).

We also note that the five FNArena database stockbrokers having updated on Woodside’s result between them have an average 2023 dividend forecast of US151c.

Gas price moves aside, Woodside was always going to lower its dividend payout in order to fund costly growth projects in the coming years. Yet with very low gearing, the company should be able strike a balance. Morgans suggested post-result that management is willing to temporarily sacrifice its gearing target in order to maintain dividends.

Macquarie suggested this may be the time the company can consider shifting to a free cash flow (rather than earnings) based payout.

Ord Minnett considered the possibility the ordinary payout may be reduced in preference for special dividends and/or share buybacks, notwithstanding acquisitions.

Suffice to say it’s not cut and dried.

Jarden has an Underweight rating on Woodside with a target of $33.60. The FNArena database has four Hold and one Accumulate (Ord Minnett) rating for a consensus target of $37.20 (last trade $34.98).

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