Largest-Ever IPO May Land In Your ETF

December 11, 2019

The largest initial public offering in stock history began trading today.

Saudi Aramco, the state-owned oil company of Saudi Arabia, surged 10% in its debut on the Tadawul stock exchange in Saudi Arabia.

At its current price, Aramco has a valuation of $1.88 trillion—short of the $2 trillion valuation that Saudi Crown Prince Mohammad bin Salman had wanted—but more than the low-ball valuations that were being thrown around a few weeks ago.

It also makes Aramco the most valuable publicly traded corporation in the world, ahead of U.S. tech giants Apple and Microsoft, each of which are worth around $1.2 trillion. Additionally, Aramco’s addition makes the Saudi stock market the seventh-largest in the world, according to Bloomberg.

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Company Market Cap
Saudi Aramco $1.88T
Apple $1.2T
Microsoft $1.2T
Alphabet $928B
Amazon $862B
Facebook $574B
Alibaba $543B
Berkshire Hathaway $541B
JPMorgan $422B
Tencent $416B


Aramco priced its IPO last week, raising $25.6 billion for a 1.5% stake in the company at a $1.7 trillion valuation. Though those figures are below what many in the Kingdom had hoped for (officials reportedly had wanted to sell 5% of the company at a $2 trillion valuation), the IPO ended up being the largest ever, surpassing the $25 billion Alibaba raised in 2014.

Foreign Investors Hesitant

The relatively humble debut for the Saudi oil giant comes as foreign investors have been reluctant to pay for anything to do with fossil fuels. The energy sector’s weighting in the S&P 500 is currently 4.3%, the lowest level in modern history, as investors anticipate a peak for oil demand in the coming years.

Ahead of its IPO, Saudi Arabia stopped marketing the Aramco IPO to foreign investors, instead relying on domestic investors to buy shares. The Kingdom offered loans and dividend guarantees to compel local investors to support the public offering.

Demand for the IPO has been relatively tepid, even though Aramco is the most profitable company in the world. The company generated net income of $111 billion in 2018, double what Apple made and more than five times what Exxon Mobil made last year.

Aramco has said it will begin paying a $75 billion dividend starting in 2020, which will be guaranteed through 2024, regardless of what oil prices do. That translates into a dividend yield of 4% at current prices.

Pros & Cons

Aramco’s dividend yield is on the lower end of what oil majors like Exxon, Chevron and others are paying. Exxon currently yields 5%; Chevron yields 4.1%; ConocoPhillips yields 2.7%; BP yields 6.7%; and Royal Dutch Shell yields 6.5%.


Company Market Cap
Exxon Mobil $294B
Chevron $221B
Royal Dutch Shell $203B
Total SA $140B
PetroChina $140B
BP $123B
Petrobras $100B
Gazprom $91B
Sinopec $82B
ConocoPhillips $67B


Risk On

Yet as a company that is majority-controlled by the Saudi state in a volatile area of the world, Aramco may be perceived as riskier than those oil majors, explaining foreign investors’ reluctance to invest. After all, only a few months ago, a catastrophic attack on Saudi oil facilities led to the temporary shuttering of half the Kingdom’s oil production.

Aramco is also subject to production quotas set by the Organization of the Petroleum Exporting Countries, which often pushes its members to cut output.

On the other hand, as the owner of some of the world’s largest oil reserves, with some of the lowest-cost production on the planet, Aramco has an easier time pumping oil than some of its rivals. In 2018, Aramco produced 10.3 million barrels of crude oil per day and held reserves of nearly 300 billion barrels.

ETF Impact

Despite being the most valuable publicly traded company in the world, Aramco won’t make that big of a splash in U.S.-listed ETFs. Its most notable weighting will probably be in the $752 million iShares MSCI Saudi Arabia ETF (KSA) and the $2.5 million Franklin FTSE Saudi Arabia ETF (FLSA).

Both ETFs hold market-cap-weighted baskets of Saudi equities, but cap the weighting of any individual stock at 25%. That means, even with its tremendous valuation, Aramco’s weighting will be tempered somewhat.

Aramco could also find itself a part of broader ETFs, like the $64 billion Vanguard FTSE Emerging Markets ETF (VWO), the $58 billion iShares Core MSCI Emerging Markets ETF (IEMG) and even the $13 billion Vanguard Total World Stock ETF (VT). For reference, Saudi stocks currently make up about 2.5% of IEMG.

Index providers MSCI, S&P Dow Jones and FTSE Russell told Reuters that they are considering fast-tracking the Aramco IPO so that it could be included in indices as soon as this month. If so, investors could find shares of the company in emerging market and broader international equity ETFs soon after.


Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2


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