Woodside Energy Group Ltd (ASX: WDS) shares have long been an appealing investment option for the dividends the ASX energy share pays. However, Woodside's passive income payments depend on energy prices and capital expenditure requirements.
As investors, we must remember that commodity companies such as Woodside are significantly leveraged by how their corresponding resource price performs.
Production costs for commodity-based companies typically don't change much from month to month or even year to year, so an increase in the relevant resource price can lead to a large profit boost. But, the opposite is true when prices drop – the revenue decline essentially cuts into profitability.
When commodity prices weaken, a company's cash requirements can be greatly strained if it has a significant investment pipeline. Profit generation may not be able to fund both a hefty dividend and major growth spending.
Ideally, a business shouldn't increase its debt to fund its dividend payments. So, where does Woodside stand against this backdrop?
Macquarie reduces Woodside dividend expectations
According to reporting by The Australian, analysts at Macquarie have decided to downgrade the rating on Woodside shares to neutral. Macquarie's price target is unchanged at $27, however, implying a possible rise of close to 4%.
The rating downgrade is due to Woodside's pursuit of an acquisition strategy in the United States and lengthening its capital expenditure cycle to 2030. This comes with a prediction that Woodside's debt levels/gearing will rise to the top end of its range in 2025, at the same time as the crude oil balance between supply and demand is "fundamentally loosening".
All of which could lead to a sizeable reduction of the Woodside dividend. Macquarie analyst Mark Wiseman had this to say:
Woodside is investing to reposition for the long term; however, prolonged heavy capex is an impediment to re-rating, for now.
Woodside is driving an aggressive growth strategy, and as a result we forecast a dividend payout [ratio] cut to 60 per cent in our forecasts is necessary to ensure gearing doesn't run to levels materially above the 20 per cent guardrail.
Woodside didn't see this as necessary at the 1H24 result, but with deals now completed, this could change.
Lower earnings due to a weaker commodity price, combined with a smaller dividend payout ratio, is likely to result in lower passive income.
Currently, the broker UBS forecasts that the FY25 Woodside dividend per share could be cut by approximately 25% year over year to US$1.04 per share. Time will tell whether these brokers are right to be worried about the size of the ASX energy share's future dividend payments.
