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Woodside Petroleum Investors Set for Dividend Shock in 2015: JPMorgan

Investors in Woodside Petroleum are in for a shock in the shape of a sharply lower dividend for the 2015 financial year should oil price stay low, signalling that the upcoming dividend in February could be the last of the good times until prices pick up, according to JPMorgan.

Running a calculation on the hit on Woodside’s dividend assuming oil prices stay around $US50 a barrel, the broker found that the payout could slump to just US64¢ per share for the 2015 financial year from the $US2.58 expected for all of 2014.

However, under JPMorgan’s current forecasts for Brent crude oil, of $US82 a barrel for 2015, the drop in the payout to shareholders would be much smaller but still significant, with the dividend falling about 42 per cent to $US1.49 per share.

Still, in a research note ahead of Woodside’s quarterly report scheduled on Thursday, JPMorgan analyst Benjamin Wilson described the bank’s oil price forecasts as “optimistic” given Brent’s slide below $US50 on Monday.

Brent crude oil, the global benchmark, tumbled another 5.6 per cent on Monday to $US47.27 a barrel, bringing the slump since August to almost 60 per cent.

Evidence of the impact of the price weakness will be evident in Woodside’s quarterly sales report, but the greater impact of a persistent low oil price would be seen in the 2015 results because of the lag of several months between any change in oil prices impacting prices under liquefied natural gas sales contracts.

Woodside in 2013 adopted an 80 per cent payout ratio as its dividend policy, and while the ratio is set to be maintained the decline in the absolute level of earnings from lower oil prices will inevitably feed through to shareholder returns.

Shares Staying Afloat

Woodside’s shares have been relatively resilient to the oil price slump compared to some of its peers, falling 14 per cent in the past four months compared to a near-26 per cent slide in the Australian Securities Exchange’s benchmark energy index. The company’s low debt and ample funding capacity has spared it from the worst of the impact so far.

Shares in the country’s largest pure-play oil and gas producer dipped 1.9 per cent on Monday to $36.35.
But the extent of the cut to dividends possible for 2015 could still take a back some investors, Mr Wilson said in his note to clients.

“Given Woodside’s leverage to oil prices we feel the magnitude of its outperformance relative to peers squarely reflects its strong balance sheet and ability to weather the current storm,” he wrote.
“We caution, however, that the magnitude of earnings and dividend reductions should the current oil price environment persist may surprise some in the market.”

JPMorgan also ran the numbers on its valuation of Woodside at current low oil prices, finding that its discounted cash flow valuation of the stock reduces to about $19 a share if spot price assumptions are assumed to persist for ever. That compares with its current valuation of about $42 per share based on its existing price estimates.

JPMorgan is forecasting Woodside will report production of 22.5 million barrels of oil equivalent for the December quarter, generating sales revenues of $US1.77 billion. That would still be up on the December 2013 quarter sales of $US1.65 billion, reflecting the fact that the downward acceleration in oil prices only took hold later in the year.

The estimated December quarter output would bring full-year production to 94.2 million boe, within the company’s guidance range of 93 million-95 million boe.
Woodside made a record dividend payout for the 2013 financial year of $US2.49 per share.


1. In the above article, JPMorgan noted that Woodside Petroleum may be under pressure to reduce or omit dividends on its ordinary shares as a result of a weak oil prices. Carefully examine why the reduction in dividends may harm its shareholders.

2. There is evidence to suggest that dividends have a more stable pattern than earnings. According to the article, Woodside in 2013 adopted an 80 per cent payout ratio as its dividend policy. What reasons can you suggest for the management of Woodside adopting a policy of paying a stable dividend in the face of declining earnings from lower oil prices?

3. Usually the Board of Directors increases dividend per share only slowly in response to rising profits, and is even more reluctant to decrease dividend than to increase it. Give reasons for this behaviour pattern. Is this behaviour more likely to be observed under an imputation tax system than under a classical tax system? Why, or why not?


Omitting dividends or a reduction in dividends generally sends a signal to the market that the company is experiencing some level of financial distress. This in turn could cause the stock price to fall. With a drop in share price the shareholders equity and capital gains would diminish. In their journal article (Liu, Szewczyk and Zantout 2008) found that although the abnormal returns may reduce a company’s share value by a range of -5.89 to -14.52% this reduction usually only lasts for around a year.

Given the strength of Financial Ratios in comparison to the Industry average that Woodside enjoys (IbisWorld 2014) it would not be expected that the share price of Woodside would drop drastically, nor for a lengthy period. The greatest harm would be to those shareholders that have retired and rely on the dividend payout for income. This drop in dividend may see these investors sell off Woodside stock in favour of stock that has better dividend payouts.


Generally fixed dividend ratio policies are adapted by more mature companies when their long term earning capacity is fairly stable. This policy may be more favourable to shareholders as they have a more stable indication of what to expect from their dividends.

In his paper “An empirical test of stable dividend hypothesis”(Sahu 2002) Sahu identifies that a more stable dividend policy provides some certainty of return to the shareholders and that such stability leads to a reduction of the rate of return required. As opposed to a floating dividend policy which leaves shareholders with less stability and conversely an increase in the required rate of return.

Woodside’s 80% fixed dividend policy, even in the light of reduced earnings due to the falling oil price would provide investors with more stability than reducing the dividend ratio. This policy should also help stabilise the drop in share price due to the unfavourable current conditions.


Stable dividend payouts’ are more favourable to a company and its share price. If unusually high earnings are made in one year then a slight increase in dividends and greater retained earnings would be appropriate. The retained earnings can be put towards positive NPV projects by the company in the coming year and help generate greater future earnings. Retained earnings may also be utilised for share buyback. Conversely a substantial drop in dividends paid out send a negative signal to the market that the company may be in some financial strife.

The behaviour of raising dividends slowly would be more likely within a classical taxation system rather than an imputation tax system. Under a classical taxation system such increases would be taxed twice; once at the company level and again at an individual level. In their study (Jugurnath, Stewart and Brooks 2008) identify that the classical system in regards to dividend payment is both discriminatory and economically inefficient as resources are transferred from the corporate to the unincorporated sector.

Whereas with an imputation tax system the gains are taxed only once on the company level and individuals enjoy the benefit of “franked” dividends. That is to say that depending on the individuals tax bracket either no tax is payable on the dividend, or only the difference of the individuals tax level less the company tax rate will be paid in tax. i.e. if the individual is on a top tax bracket of 48% then the tax payable on the dividend paid is 48% less current company tax rate of 30% = 18%
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