Santos Ltd’s [ASX: STO] shares are up by over 2% this afternoon, after the company announced a new dividend payout policy to counter fluctuating oil prices.
Additional news that the policy will commence earlier than expected has sent shares rocketing into more than a one-month high.
The share price is now trading at $6.25.
Why Has the Market Reacted This Way?
Resources shares can be volatile due to the changing currents of supply and demand that affect underlying commodities. It is these, after all, that affect the overall market price.
In response, Australia’s second largest gas producer Santos has sought to reward shareholders for their support during volatile business conditions.
The new dividend policy has been officially approved by the board, and targets a payout range of 10–30% of annual free cash flow.
Santos defines free cash flow as ‘operating cash flow less investing cash flow (including all sustaining capital expenditure, exploration spend and interest payments)’.
In a statement, the company added:
‘Given the cyclical nature of the industry, the board will also consider additional returns to shareholders above the ordinary dividend when business conditions permit.’
Santos also said in the announcement that it was on track to achieve its net debt reduction target in the second half of 2018. This news indicates a pleasant turnaround for a company that has had to cut costs dramatically, since an oil price crash in 2016 forced a reckoning with debt.
What’s next for Santos?
Investors will be pleased that the oil and gas giant knows how to create a strategy that works. Cutting costs has so far been proven to be fruitful, and the new policy could be an attractive option for shareholders who want to profit from impulsive oil price booms.
But can the good times continue for Santos?
Though the dividend policy might be exciting for some, others may find the payout structure to be on the conservative side. Companies like Woodside Petroleum Ltd [ASX:WPL] and Oil Search Ltd[ASX:OSH] pay closer to 50% of net profit after tax.
Overall though, this is a decisive move from Santos and heralds a stronger future than previous years.
Interested investors would be wise to carefully compare dividend policies with other companies in the oil and gas industry, to ensure they choose a company whose strategy best fits their risk management profile.
Editor, Money Morning