In early March, Ecopetrol, Colombia’s largest oil company, released its consolidated financial report for the previous year, revealing a significant 21.7% decrease in its earnings.
According to local media outlet La Republica, this decline translates to a staggering $4.1 trillion drop in profitability, with the company reporting earnings of $14.9 billion compared to $19 billion in 2023.
These figures raise concerns among investors and stakeholders regarding the financial sustainability of the state-owned entity and its response to market challenges.
Dividend proposal: mixed reaction
Despite the steep decrease in profitability, Ecopetrol’s General Shareholders’ Assembly, scheduled to meet today, will examine a request for a dividend of $214 per share.
This figure represents a payout ratio of 58.9% of Ecopetrol’s net income, indicating the company’s commitment to maintaining shareholder payouts despite financial difficulties.
The planned dividend is scheduled to be paid out in two equal installments—one on April 4 and another on June 27—and is significantly lower than last year’s dividend of $312 per share.
The company remarked, “In line with the current dividend policy, the distribution project proposes to allocate a total ordinary dividend of $214 per share.”
While this proposal may come as a relief to shareholders, the decrease raises questions about the adequacy of returns amidst declining profitability.
Strategic reserves: financial cushion or mismanagement?
In addition to the dividend plan, Ecopetrol’s board of directors has proposed creating an occasional reserve of $16.6 billion.
This reserve is intended to strengthen the company’s financial sustainability and increase flexibility in strategy development.
However, industry experts disagree on whether this move adequately solves the company’s larger financial difficulties.
Diego Palencia, Vice President of Research and Strategy at Solidus Capital, highlighted the inconsistency in Ecopetrol’s financial practices, stating that “in recent assemblies, dividends have been approved even though the capital structure, with negative cash flow, does not support such a distribution.”
The ongoing approval of dividends despite dwindling profits has created negative sentiment in financial markets, as seen by a falling stock price and weaker ratings from many risk assessment agencies.
Market sentiment: dividends vs. risk
Analysts are analyzing the proposed dividend in light of Ecopetrol’s financial health.
Juan David Ballén, Director of Analysis and Strategy at Aval Casa de Bolsa, stated that the proposed dividend “remains appealing for moderate to aggressive risk-profile investors.”
He underlined that the dividend yields 10%, giving it one of the strongest returns among Colombian stocks, ensuring competitiveness against fixed-income investments.
In contrast, Jahnisi Cáceres, an Equities Analyst at Acciones & Valores, stated that the proposed dividend is consistent with Ecopetrol’s regular distribution ratio, making it a reasonable amount given the current situation.
However, Palencia cautioned that implementing a dividend policy that does not reflect a genuine value-creation dynamic is both reckless and unethical.
He warned that Ecopetrol and ISA are confronting serious political and governance issues, resulting in ongoing value destruction and capital erosion.
A cautious path forward for Ecopetrol
As the annual meeting approaches, investors and shareholders are eagerly watching to see if Ecopetrol’s decisions will improve its market position or lead to a greater financial catastrophe.
The disagreement among analysts demonstrates the difficulty of running a significant state-owned corporation in a difficult economic environment.
Unless strong steps are taken to enhance underlying business performance and solve governance challenges, Ecopetrol may face a difficult future—one that necessitates strategic reconsideration and, possibly, a more cautious approach to dividends.
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