A strong double-digit dividend yield paired with an EV/EBITDA close to 3.5x is most definitely eye-catching. That’s the case of the oil company Petroleo Brasileiro SA- Petrobras (PBR), or Petrobras for short, which has been a great performer over the past few years, largely thanks to its stalwart dividend appeal. However, in the last two years, the company has shifted its focus toward expanding its businesses and investing in exploration, production, and renewables, dampening the oiler’s dividend appeal.
As demonstrated by its Q4 results, Petrobras is showing signs of weakness in maintaining the same level of dividend distribution as in the past. With that in mind, I take a bearish stance on the company, acknowledging that as the dividend thesis loses steam, the market’s interest in Petrobras is likely to also fade.
Despite seemingly attractive valuations, Petrobras faces political and oil-related risks that likely justify its current discount. Therefore, even with a double-digit dividend yield in the mid-teens over the next couple of years, I don’t believe it will generate annualized returns as compelling as those seen over the last five years.
A Closer Look at Petrobras
Petrobras is a giant oil company based in Brazil, and it’s primarily controlled by the Brazilian government. As a result, it often trades at a discount compared to international peers, mainly due to the risk of political interference. A clear example is that Petrobras has churned through six different CEOs over the past three years.
Nevertheless, Petrobras is known for being a generous dividend payer, which has attracted many income-seeking investors in recent years. With global oil prices soaring due to geopolitical tensions, Petrobras has offered impressive dividend yields—over 33% in 2022, 42% in 2023, and about 20% over the past twelve months.
To give you an idea, if you had reinvested dividends over the past five years, Petrobras would have delivered an annualized return of 19.7%, while the S&P 500 returned 14.3%. Remember, though, that Petrobras stock comes with much higher implied volatility, with a standard deviation of 49% compared to the S&P 500’s 18%.
On the flip side, if you don’t account for dividend reinvestment, Petrobras actually posted an annualized return of -3% over the same period, while the S&P 500 saw a solid 12.6%.
The Impact of PBR’s Growth Strategy on Dividends
Even though Petrobras offers incredibly appealing dividends, thanks to its consistent free cash flow generation, the investment thesis is starting to lose some of its shine compared to the not-so-distant past. Simply put, Petrobras is stepping on the capital expenditure (capex) accelerator.
The company’s strategic plan for 2025-2029 outlines that 70% of its total investment will go toward exploration and production, as well as funding a broad-based transition towards renewables. Importantly, and possibly a worry for some investors, is that renewables are not a part of PBR’s core business, which means eventual returns are uncertain. The new plan, announced at the end of 2024, will spend 9% more on renewables. However, plenty of risks are involved—ranging from the challenges of extracting oil from new wells to the political risks of being government-owned. Let’s not forget the corruption scandals Petrobras faced about a decade ago, tied mainly to its E&P investments.
Since Petrobras is now more focused on growth and expansion, its free cash flow is likely to be less robust, which means less capital will be available for dividends. It’s worth noting that Petrobras’ dividend policy (which was trimmed in 2023) states that it must pay out at least 25% of profits. Additionally, it can distribute 45% of free cash flow, but only if its gross debt is under $60 billion.
Take 2024 as an example: Petrobras reported a free cash flow of $23.3 billion, down 25% from $31 billion in 2023. Its gross debt was also at the limit, at $60.31 billion. In other words, this is a less bullish scenario for dividends, which recently have been the main driver of the company’s outperformance in the market. PBR is flogging the very horse that rode the stock into its strong market position in the first place.
The Risks Lurking Behind PBR’s Attractive Valuation
Many investors might look at Petrobras’ investment thesis—where the company offers a 20% dividend yield and trades at a forward EV/EBITDA of just 3x—and think taking a bearish stance is unwise. But there’s more to Petrobras than just those numbers. The company is complex, with challenges around governance, its exposure to Brazil’s emerging economy, and its vulnerability to fluctuations in fuel prices.
Take the company’s latest Q4 and full-year 2024 results, published at the end of February. Petrobras’ net profits dropped significantly, from $25 billion in 2023 to just $7.5 billion in 2024. This sharp decline was attributed to a $10.9 billion impact from FX variations (the BRL devaluing sharply against the USD since most of Petrobras’ debt is dollar-denominated), a $6.5 billion hit from Brent and diesel crack spread depreciation, and a $2.7 billion “federal tax transaction.” Moreover, sales revenues fell by 9.5% in 2024.
Given PBR’s sensitivity and exposure—while not entirely the company’s fault—can lead to profitability swings. Understandably, Petrobras may deserve to trade at a discount compared to private international peers, especially those operating in markets with more stable currencies.
Is PBR a Good Stock to Buy Now?
On Wall Street, PBR stock carries a Strong Buy consensus rating based on three Buy, one Hold, and zero Sell ratings over the past three months. PBR’s average price target of $17.35 per share implies approximately 32% upside potential over the next twelve months.
Beware of the PBR Value Trap
As Petrobras’ investment thesis based on shareholder returns becomes less compelling—due to the shift towards capex-intensive projects, recent changes in its dividend policy, and other inherent risks—I don’t believe the company will be able to outperform the broader market. The outlook for PBR stock is drastically less optimistic if dividends falter because a sizeable chunk of PBR shareholders hold the stock because of its dividend proposition. If this factor is undermined, so will PBR’s share price in the short-medium term.
While the company still has solid fundamentals and high-quality assets, the risks associated with investing in a commodity-driven company like Petrobras—coupled with the political risks of being state-owned and exposed to an emerging economy—add layers of complexity to the investment thesis. This makes Petrobras a potential value trap for investors who rely solely on raw valuation metrics.