Saudi Aramco (SASE:2222): Not The Sexiest High Dividend Yield Stock, But One With Interesting 'Convertible-Like' Qualities

KEY TAKEAWAYS

• Dividend Yield as a Core Attraction: Saudi Aramco’s 7% dividend yield makes it a compelling income-generating asset, functioning like a “convertible bond” with steady payouts and long-term growth potential.
• Premium Valuation Justified: Despite a PE ratio of 16, higher than the sector average of 10, Aramco’s scale, profitability, and strategic importance justify the premium, with potential for modest upside to a PE of 20 in an optimistic scenario.
• 10-Year Investment Horizon: Unlike most companies, Aramco warrants a 10-year outlook, supported by its alignment with Saudi Arabia’s Vision 2030, the Public Investment Fund (PIF), and its financial strength, allowing investors to “sit and wait” while collecting dividends.
• Balanced Valuation Scenarios:
  • Optimistic Scenario: Share price could double to 48–49 SAR over 10 years, delivering a 14% total annual return (7% price growth + 7% dividend).
  • Pessimistic Scenario: Share price may drop to 12–13 SAR, but this is far less likely due to Aramco’s cash-rich position and strategic advantages.
  • As of today, we do therefore weight the optimistic scenario a bit heavier and end up with a fair value estimate of SAR 37 for the shares. Up 42.3% compared to today's prices.
• Strategic Role in a Multipolar World: Aramco’s position in a multipolar world order, balancing relationships between the West and East, combined with its renewable energy potential and regional influence, makes it a cornerstone stock for diversification and stability.
• Note: We are NOT a shareholder yet at the time of writing the article. However, with global stock markets in a nervous mode lingering close to their tops, we believe that yield will gain in importance. In this quest for higher dividend yields and a larger exposure to 'value' vis-a-vis 'growth', we also want to diversify regionally within such a yield portfolio. This is how our screeners picked up Saudi Aramco as an interesting opportunity that we wanted to share with you.

Introduction

Saudi Aramco is a company that needs no introduction. As the largest and most profitable oil company in the world, it stands as a cornerstone of Saudi Arabia's economy and an integral part of the country’s Vision 2030 strategy. For investors seeking income, diversification, and exposure to the Middle East and Gulf regions, Saudi Aramco offers a unique proposition. With a 7% dividend yield, a robust balance sheet, and long-term strategic potential, the company is a compelling option for value investors and a stabilizing anchor for riskier portfolios.

A Strategic Perspective: Beyond Fossil Fuels

Saudi Aramco’s current PE ratio of 16 is higher than the sector average of 10, but this premium is well justified. The company’s scale, cost efficiency (primarily due to the relatively low cost per barrel to get the black gold at the surface), and ability to pivot into renewables on its own terms (think about the amount of sun and land that the country has at its disposal as soon as it makes a really serious switch towards sustainable energy!) position it as a long-term player in the global energy market. While the world moves toward a renewable energy future, Aramco’s financial strength and strong ties to the Saudi government provide it with the flexibility to adapt without rushing into unsustainable ventures. And to the extent that many sustainable champions struggle in the Trumpian World (compare for instance the fate of Northvolt!), the only giant that can literally play the harmonica / swing the pendulum between fossil fuels and renewables is Saudi Aramco. It can afford not to choose and work on both trajectories at the same time!

Additionally, the rise of middle-class populations in emerging markets, particularly in BRICS nations, ensures that demand for energy will remain robust over the next decade. This demand will not only support Aramco’s core fossil fuel business but also provide opportunities for growth in downstream products and renewable energy initiatives.

The Role of Vision 2030 and Regional Growth

Saudi Arabia’s Vision 2030 represents a transformative shift for the country, with Saudi Aramco playing a central role. The Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, operates with long-term time horizons and a clear commitment to diversifying the economy. By aligning with PIF’s strategy, Aramco gains the patience and resources to execute its plans over the next decade. This includes potential investments in solar energy and hydrogen, which could position the company as a global renewable energy leader when the timing and conditions are favorable. No need to worry about being a late entrant when you can afford to buy yourself in via M&A deals!

Regionally, Saudi Arabia is also becoming a stabilizing force in the Gulf, balancing relationships with both Western and Eastern powers. This geopolitical positioning reduces risks and enhances Aramco’s attractiveness as an investment in a multipolar world order.

Investment Outlook: A Long-Term Perspective

Unlike most companies, Saudi Aramco warrants a 10-year time horizon for analysis. Normally we would consider this way too far into the future and prefer a 3-5 year window. The fact that we dare to look further away is not just its sheer size and wealth, but also its strong dividend yield, financial resilience, and alignment with PIF’s long-term strategy in a world in which the influence of the country is most certainly on the rise. We believe that it is not coincidental that the negotiations between Ukraine and Russia under US leadership took place in Riyadh with a neat position for the Saudi hosts there.

Investors can afford to “sit and wait” while collecting dividends, making it a unique income-generating asset with LT growth potential and manageable downside risks. A kind of 'bond-plus' if you like.

Revenue Growth:

• For the next 5 years, we estimate revenue growth at 6% annually (minimum 4%, maximum 8%).
• Over a 10-year horizon, we project 9% annual growth, incorporating a 3% inflation rate and modest real growth.

Profit Margins:

• Profit margins are expected to remain stable at 20%, with potential efficiency gains pushing them slightly higher to 23% in the optimistic scenario.

Discount Rate:

• For the 10-year horizon, we use a discount rate of 9% (minimum 7%, maximum 11%), reflecting Aramco’s low-risk profile and the stability provided by its government backing on the one hand, and growing 'spider-in-the-center-of-the-web' role in a world that is turning multipolar.

PE Ratio:

• We maintain a forward PE of 18, with a potential upside to 20 in a more optimistic scenario. We are aware of the fact that this is higher than most oil and gas companies and certainly those in emerging markets, but we believe that this is warranted by their unique position and size.

Valuation and Scenarios

At today’s share price of 25–26 SAR, Saudi Aramco appears reasonably priced. Here’s how the valuation plays out under different scenarios:

1. Optimistic Scenario:
   • Revenue growth: 9% annually
   • Profit margin: 22%
   • Discount rate: 8%
   • PE ratio: 20
   • Fair Value Estimate: 48–49 SAR
   • This scenario translates to a 7% annual stock price return, which, when combined with the 7% dividend yield, delivers a 14% total annual return.An OK result, but nothing very sexy.
2. Pessimistic Scenario:
   • Revenue growth: 4% annually
   • Profit margin: 20%
   • Discount rate: 11%
   • PE ratio: 15
   • Fair Value Estimate: 12–13 SAR
   • While this outcome is possible, it is far less likely given Aramco’s strong financial position and strategic importance. This scenario seems only likely in a world on fire in which the Middle East explodes with for instance a serious war with involvement of Israel, Iran, Saudi Arabia AND the USA. To be honest: we actually find it more likely that the bulk of skirmishes between Saudi Arabia and Iran is behind us, now that Mohammad bin Salman himself is maneuvering away from Wahabi / Sunni orthodoxy into a more liberal way of running the country. This will most certainly reduce the opportunity for a clash between Sunni and Shia clerics that extrapolates into major economic and geopolitical consequences.CONCLUSION: our 'best estimate' for valuation is a bit more skewed towards the optimistic scenario, which gets a bit more weight than the pessimistic one.
3. Best Estimate:
   • Revenue growth: 10% annually
   • Profit margin: 22%
   • Discount rate: 8%
   • PE ratio: 20
   • Fair Value Estimate: 37 SAR
   • This reflects a balanced view, incorporating Aramco’s strengths and the likelihood of positive developments under Vision 2030.

A Unique "Convertible" Investment

Saudi Aramco’s 7% dividend yield makes it an attractive option for income-focused investors. In many ways, it functions like a “convertible bond,” offering steady income with the potential for capital appreciation. The company’s exposure to the Middle East and Gulf regions, coupled with its ability to balance relationships with both Western and Eastern blocs, positions it as a cornerstone stock for diversified portfolios.

For value investors, Aramco provides stability and income. For those with more aggressive portfolios, it serves as an anchor to offset riskier bets in emerging markets or small-cap growth stocks. The combination of a strong dividend yield, long-term growth potential, and geopolitical positioning makes Saudi Aramco a compelling investment in a rapidly evolving world.

Final Thoughts

Saudi Aramco is not a high-growth stock that will deliver outsized returns through stock price appreciation alone. However, it offers a rare combination of income, stability, and diversification in a region that is difficult for most foreign investors to access. With the world transitioning from a unipolar to a multipolar order, Saudi Arabia's strategic importance will only grow, and Aramco is well-positioned to benefit from this shift.

While we don’t expect Aramco to be a “gemstone stock,” it is undoubtedly a cornerstone holding for investors seeking exposure to emerging markets, energy, and the Middle East.