Dividend Cuts Show Pain of Cheap Oil for Emerging Companies

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  • Payouts smallest relative to developed countries since 2008
  • Cutting dividends signals balance sheet stress: Amiya Capital

Energy producers in emerging markets are cutting dividend payments faster than peers in developed countries after a slump in crude prices and slackening demand in China forces them to preserve capital.

While the average projected payout per share from energy firms in the developing world is 74 percent higher than those in advanced economies, the premium narrowed to an eight-year low this month, according to data compiled by Bloomberg. Estimated dividends from emerging energy companies have fallen more than 12 percent since the end of last year, the data show.

“It is a sign of balance-sheet stress,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who favors health-care and consumer-staple stocks. “Emerging-market companies are cutting dividends to defend their balance sheets. Cutting dividends could be a bullish signal in that companies are taking steps to shore up their capital base, but I need to have more conviction that oil prices have bottomed before buying.”

Energy producers are taking steps to adjust to a drop in revenue after oil prices, which have posted declines in the last three years, slid 28 percent in the past 12 months. While Brent crude has recovered 9 percent this year to $40.73 a barrel on Thursday, Goldman Sachs Group Inc. predicted in a March 7 report that crude will fluctuate between $20 and $40 a barrel over the next year.

Oil prices have been depressed amid a glut in supply that’s worsened as growth in China, the biggest emerging market, slowed and amid projections of higher crude production in Iran. The dividend-per-share estimate is based on a projection for the current fiscal year of each company in the MSCI indexes.