3. Beware investing in autocracies
One company that's still desperate to go public is Aramco, Saudi Arabia's state-owned oil company. (Hence the long list of financiers willing to return to the country's "Davos in the Desert" conference later this month.)
- The big problem with Aramco is not so much that it's being hit by drone strikes, or that oil prices are unhelpfully low. Rather, it's that it's owned by the Saudi state, which is to say, the Saudi royal family.
Driving the news: Aramco promised this week that it would set a dividend of at least $75 billion through 2024 — or, at the very least, that non-government shareholders would receive at least $750 million in dividends for every 1% of the company that they own, from 2020 through 2024.
Why it matters: Because the Saudi royal family controls Aramco, it doesn't need the company to pay any dividends at all.
- If they need to extract money from Aramco, they can always raise the company's tax rate, or simply expropriate what they need.
- Foreign shareholders could be stuck with worthless shares paying zero dividends.
Between the lines: In many ways the Aramco situation is similar to that of Fannie Mae and Freddie Mac. The U.S. government controls the agencies and their profits. Private shareholders, who own 20% of the equity in the companies, have received nothing from them for over a decade.
- If the U.S. government allowed Fannie and Freddie to start paying a dividend, shares would rise. But so long as the government holds the reins, shareholders know that their cashflows can always revert to zero at any time.
- The bull case for Aramco shares is that the Saudi government wants to see a multitrillion-dollar valuation for the company. If that fact ever changes, then it's hard to see foreign shareholders being able to extract much value.
Why you’ll hear about this again: Investing in autocracies is part of modern capitalism. In China, for instance, PayPal is buying Gopay, a local payments provider.
- It's easy to see why PayPal wants exposure to the massive Chinese market — but at the same time the company knows there's always a risk of the government turning against it and nullifying the deal.
- If that happens, PayPal has no real recourse. (It's not going to sue the Chinese government in Chinese courts.)
The bottom line: In countries with robust civil societies, shareholders have significant legally enforceable rights, and those rights underpin the value of their shares. In countries like China and Saudi Arabia, by contrast, foreign shareholders only win insofar as it behooves the local government to keep them happy.