The challenge with investing in resources shares is the cyclical nature of supply and demand for the underlying commodity which affects its market price.
Take oil for example. The West Texas Intermediate (WTI or NYMEX) crude oil price per barrel has fluctuated from US$ 18 in December 1998 to US$ 147 in May 2008 to the current price of US$ 72 in June 2018.
This volatility in commodity prices affects the profitability of resource shares from one year to the other and consequently, the amount of dividends it can pay out to shareholders.
That is the challenge that Santos Ltd (ASX: STO) is trying to combat as it announced its new dividend policy today.
Santos announced that it would, “look to pay ordinary dividends that are sustainable through the oil price cycle and will target a range of 10% to 30% payout of free cash flow generated per annum”.
The announcement also states that Santos would consider, “additional returns to shareholders above the ordinary dividend when business conditions permit”.
Santos defines free cash flow as, “operating cash flow less investing cash flow (including all sustaining capital expenditure, exploration spend and interest payments)”.
What do others do?
So how does this new policy compare with other companies in the market? Below are two oil shares and their current dividend policies.
|Woodside Petroleum Limited (ASX: WPL)||To pay a minimum 50% of underlying net profit after tax in dividends.
Woodside currently pay an 80% dividend payout ratio and targets maintaining this subject to market conditions.
|Oil Search Limited (ASX: OSH)||To pay 35-50% of core net profit after tax.
Oil Search’s current pay out ratio is approximately 48%.
It appears that Santos has a more conservative dividend policy and is looking to manage dividend expectations given oil prices and its debt obligations.
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You can find Kevin on Twitter @KevinGandiya.
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.