Discovering the pleasure of dividends in Russia

February 20, 2012

American financier J.D. Rockefeller said watching dividends rolling in was the only thing that gave him pleasure. But it is a pleasure which until now has largely bypassed shareholders in most big Russian companies. That might be about to change.

Russian firms,  especially the big commodity producers, are generally seen as poor dividend payers. So dividend yields, the ratio of dividends to the share price,  have been unattractive.

On a trailing 5-year period, the average dividend yield in Russia was 1.8 percent compared to 2.5 percent for emerging markets, notes Soren Beck-Petersen, investment director for emerging markets at HSBC Global Asset Management. That absence of positive cash flow from companies is one reason why Russia has always traded so cheap relative to other emerging markets, he says.

See the following graphics from my colleague Scott Barber (@scottybarber)

But as the graph above shows, the ratio has been improving. Beck-Petersen says it stands now at 2.1 percent for Russia versus 2.7 for emerging markets. Smaller oil companies Bashneft and Surgut pay double-digit dividend yields on their preferred shares. Steelmakers Evraz and Mechel gladdened shareholders last year with decent dividends.

 

And in December, Russia’s biggest company Gazprom announced it would more than double dividends to pay out almost $7 billion.  That pushes up Gazprom’s dividend yield to a respectable 4.5 percent, triple the 2009 levels. Because the company makes up almost a third of MSCI’s Russia index, the payout will likely raise the Russian average dividend yield above the emerging markets average.

There is a motive. The Russian government, Gazprom’s bigest shareholder, will receive over half the dividend bonanza, cash that it needs to soothe the increasingly dissastified electorate. But minority shareholders will also benefit.

Will it last? Investors are hopeful, noting the reform pledges made by Prime Minister Vladimir Putin after the mass protests of last December. Jesse Sherman at Renaissance Asset Managers in fact sees the developments in Russia as part of a pattern:

Governments, which remain significant shareholders in many of the companies, need cash to meet social obligations, and the increasingly preferred method for generating capital are dividends – a trend already visible in Poland and Russia.

Sherman notes the MSCI Eastern Europe Index (of which Russia constitutes over half) has a 3.1 percent expected dividend yield for last year well ahead of S&P 500′s at 2.1 percent and it is closing the gap with Euro Stoxx 600 constituents at 4.0 percent. He adds:

With future privatizations planned, sustained or improving dividends are likely.

Russia’s $200 billion privatisation plan is behind schedule but a government minister said last month that unloading shares in companies such as pipeline firm Transneft, banks Sberbank and VTB and shipping group Sovcomflot will go ahead. For the stakes to fetch a good price, Moscow will have to work on making the companies more attractive, says Beck-Petersen of HSBC GAM. Russia has the biggest weighting in his EM equity portfolio, a 5 percent overweight.

We may see a lot of privatisation initiatives and when this happens it will pressure them to raise dividend yields. We do expect that starting with a big player like Gazprom, others will follow and things will improve.

Russian stocks ended last year on a sour note as political risks prompted investors to cut exposure. (Here’s what I wrote on this in December) The market has rebounded this year along with other emerging markets but the March presidential election looms.  But IF elections  pass without violence, IF the dividend flow continues, IF the reform efforts are genuine and IF oil prices stay above $100 a barrel, then that could be the start of the process of re-rating for Russian stock valuations.

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