Petroleo Brasileiro - 33% EXTREME dividend and great valuation or dividend trap?

Who doesn't like a high dividend? But you need to have some common sense and not be tempted by a value that is too high. Looking at the 33% of this company probably makes everyone's warning lights flash. But is it justified?

Petrobras is, of course, mainly involved in mining

On Instagram, we were asked by one of our followers to analyze and evaluate the extreme dividend at Petrobras - Petroleo Brasiliero $PBR-0.4%, which caught my attention as well. So let's get right to it - is the EXTREME dividend a super opportunity or a classic investor trap?

Petroleo Brasileiro (aka Petrobras S.A.) is the largest integrated energy company in Brazil, engaged in the exploration, production and distribution of oil and natural gas. The company's annual dividend yield currently stands at a staggering approximately 30%, crushing the already impressive sector average. But the first thing an investor should be interested in is whether the company can sustain such a dividend - the company has increased its dividend payout eleven times in the past five years, which translates to a 145% annual dividend growth rate over five years.

Dividend history of PBR. Source.

I won't stretch it - it's not entirely likely. Petrobas may not be able to maintain its FY22 dividend payout through FY24 as its earnings normalize (though they are still higher than pre-pandemic). Analysts expect Petrobras to report a dividend of $1.82 in FY24, down significantly from $5.91 in FY22.

JR Research's estimated yield for the coming years. Source

Based on current estimates, its forward dividend yield for 2024 is projected to drop significantly to just 13.1%. In particular, this is based on the assumption that demand will decline and energy and oil companies will begin to lose the hyper boost they received this year.

The company has had a pretty wild time over the past five years.

The company also gained significantly in October thanks to the twists and turns in the Brazilian presidential race. But otherwise, the company has been losing its breath slightly in recent weeks.

"A leftist government would be bad news for Petrobras, which is likely to become a tool of government policy rather than a vehicle for shareholder returns." Barrons' report says.

On the other hand, the Brazilian market is generally quite confident. In fact, portfolio managers of emerging market funds (where BR belongs) trust both candidates... UBS says the MSCI Brazil index could gain "up to 15 percentage points" over the next 12 to 18 months.

The Brazilian government is a sizable shareholder in the company. This should be taken into account

The world's largest asset manager, Blackrock, is also optimistic about the prospects of the Brazilian market, regardless of the outcome of the election, as it put it:

We think Brazil can become the economic superpower it clearly has the potential to be. For investors, it is important that the incoming government - regardless of who wins - maintains fiscal prudence and institutional integrity.

Incidentally, BlackRock now fears worse: The stock market will never be the same. Now we'll be playing a different game, BlackRock experts say

But as always - PBR's 33% dividend yield needs to be carefully evaluated in the context of whether it can be sustained at current levels - and in the context of the influences I've listed. Further demand destruction in energy markets due to the looming global recession does not bode well for the safety of its dividend payout.

Analysts also say the market has downgraded PBR despite its seemingly low valuation. They fear a potential downgrade of its profitability estimates if the market expects a worse-than-expected global recession.

That this recession will be significantly worse than we are used to is also the view of Stanley Druckenmiller, one of the most profitable investors of all time: an urgent warning from a well-known billionaire and manager. Why is he convinced that the markets will soon fall to their knees?

The biggest risk for Petrobras?

More or less everyone agrees that Petrobras (despite its attractive valuation) is not going to see entirely good times in the near future.

Energy markets continued to be under pressure in Q3, despite the recent rebound after OPEC+ announced a 2 million barrel per day production cut. In addition, the IMF and World Bank warned in earnest that they saw growing risks to their 2023 forecasts, even as they revised them.

https://www.youtube.com/watch?v=4QenfSHFfO8

OPEC+ has also lowered its demand outlook for October 2022 as it sees increased risks of demand destruction. Its revised outlook shows that "daily oil demand growth is expected to decline to 2.64 million barrels per day", almost 15% lower than the September projection of 3.1 million barrels. Notably, it also highlighted that risks are skewed to the downside, with a slowdown in global economic growth, if it continues, likely to lead to a reduction in oil demand in the coming months. Which is good news for us as drivers but not investors in the sector 😁

Financially they are not in bad shape though
Funding
And they are also expanding solidly

Maintaining their huge dividend will be extremely difficult for the company. On the other hand, as far as the share price is concerned - here the estimates are more positive. Of course, again extremely dependent on the overall development of the sector, negative influences and the political situation.

Share price prediction. Source

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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on other sources (YTB, CNNMONEY, SeekingAlpha. JRResearch, Macrotrends. Petrobras). Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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