On Tuesday, Santos Ltd . (STO:AU) (OTC: OTC:SSLZY) received an upgrade in its stock rating from Neutral to Buy by an analyst at Citi, with a revised price target set at AUD7.60. The upgrade comes on the heels of the company's announcement of a new capital allocation framework that promises to deliver a higher yield to investors.
The revised framework will increase the dividend payout from over 40% of free cash flow from operations to over 60% of all-in free cash flow. According to the analyst, the change is beneficial as Santos' capital expenditure requirements to maintain its targeted production of more than 100 million barrels of oil equivalent are expected to be modest in the latter half of the decade. The higher payout percentage is seen as a positive move, as it more than compensates for the inclusion of growth capital expenditures in the dividend calculation.
Santos is anticipated to maintain its top line with an approximate 13% return on invested capital, which is deemed accretive for equity. The analysis indicates that even with a 60% payout ratio, Santos could potentially support further growth. However, in scenarios where no growth beyond the Pikka-2 and PNG backfill projects is realized, the company could afford a payout ratio of up to approximately 75% without jeopardizing its business, assuming a conservative $60 real oil price.
The analyst's outlook suggests that Santos is positioned to sustain its business and potentially increase shareholder returns without compromising its long-term viability. The forecasted modest capital expenditure in the coming years and the ability to maintain production levels seem to underpin the analyst's positive view on the stock. The new price target of AUD7.60 reflects this optimistic assessment of Santos' financial strategy and operational outlook.
InvestingPro Insights
Recent data from InvestingPro adds weight to Citi's bullish stance on Santos Ltd. (OTC: SSLZY). The company's P/E ratio of 11.54 suggests it may be undervalued, especially considering its consistent dividend history. InvestingPro Tips highlight that Santos has raised its dividend for 4 consecutive years and has maintained payments for 7 years straight, aligning with the company's new capital allocation framework aimed at higher investor yields.
The current dividend yield stands at an attractive 5.78%, with a notable dividend growth of 25.13% over the last twelve months. This robust dividend policy supports Citi's positive outlook on the stock's potential for increased shareholder returns.
Moreover, Santos's profitability over the last twelve months and analysts' predictions of continued profitability this year reinforce the company's financial stability. The stock is currently trading near its 52-week low, which could present a buying opportunity for investors following Citi's upgrade.
For readers seeking a deeper analysis, InvestingPro offers 6 additional tips that could provide further insights into Santos's investment potential.
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