Russia's 2017 dividend season opens with showdown between SOEs and FinMin

Russia's 2017 dividend season opens with showdown between SOEs and FinMin
Heavyweight state corporations like Rosneft are resisting or openly defying the 50% dividend rule.
By bne IntelliNews April 10, 2017

Russia’s 2017 dividend season is about to kick off with annual general meetings in the coming couple of months. Russia’s listed companies are now amongst the most generous in the world when it comes to sharing their profits with their shareholders, but the state-owned companies led by Rosneft are resisting a demand by the Russian Ministry of Finance to payout 50% of their profits. A lot of money is at stake.

In 2017, Russian listed companies are to distribute RUB1.56 trillion ($27.3bn), up +21% from 2016. The final 2016 dividend distribution season could bring in some RUB1.13tn, 72% of total 2017 distributions, VTB Capital said in a note. The company annual general meeting season, where the dividend question will be decided, kicks off in April.

“We estimate the 12mo dividend yield at 4.9% for the RTS. On the governance front, state-owned enterprises (SOE) dividends are still a hot topic. So far, there is no clarity as to whether the government will publish a new 50% payout directive or examine each SOE as a separate case, while setting a ‘hard’ 25% floor. We expect the issue to be resolved before the BoD meetings season kicks off in late April,” VTBC strategist Alexey Zabotkin said in a note.

The term of validity of the previous directive, stipulating a 50% payout from the highest base and issued in April 2016, expired on December 31, 2016. Since no new directive has been issued, starting from 1 January 2017 SOEs are again required to pay not less than 25% of net income (as set forth in the current regulations).

Last year, even in terms of the special payout directive, only five SOEs matched the guideline to pay 50% of the highest earnings base, says VTBC: Alrosa (50% payout of IFRS), Bashneft (50%), Moscow Exchange (50%), RusHydro (48%), and Rostelecom (118%), while Gazprom (24%), Rosneft (35%) and Transneft (9%) recommended dividends below the headline 50% guideline, having been provided with exemptions for company-specific reasons.

“Our sector teams’ base case scenarios for SOEs in 2017 (based on the 2016 financial results) imply a 50% IFRS net income payout for only two companies, Alrosa and Aeroflot. FSK is next in line after the leaders in terms of the payout our colleagues expect (32%). Gazprom’s and Gazprom Neft’s base case payouts are 25%, which still imply upside to the FY15 DPSs,” VTBC said in a note. 

There is a battle under way between the finance ministry, which has already assumed a 50% payout of profits by the SOEs in the budget revenue estimates, and the managers of the state-owned companies that are resisting paying the full 50% of profits to their owners, the state.

Last year, it seemed likely that the the 50% dividend payout scenario for SOEs would take place in 2017 as the 2017-19 federal budget, passed into law last November, was drawn up factoring in the 50% dividend payout requirement for SOEs. Moreover, the Minister of Finance Anton Siluanov was insisting that the 50% payout rule be applied to all SOEs without any exceptions in 2017 and beyond.

However, the start of 2017 brought a fresh round of debate, when First Deputy Prime Minister Igor Shuvalov voiced his view on the SOE dividend issue, which was different from the ministry’s. According to Shuvalov, the main payout guideline for all the SOEs should be kept at a ‘hard’ 25% IFRS with no exceptions, while more generous dividend distributions could be considered on a case-by-case basis.

If a 50% payout were to be implemented across the board then VTBC says the total potential 2017 payment would be an extra RUB 300mn of revenues for the state or an additional 140bp added to the 12-month RTS dividend yield 2017 dividend flow.

“We estimate the total dividend distributions from Russian companies in 2017F at RUB1.56 trillion ($27.4bn), which is +21% above the 2016 level. This total includes 2016 interims of RUB0.17 trillion, a 2016 final of RUB1.13 trillion and 2017 interims of RUB0.26 trillion. All the 2016 interims (with record dates in late December 2016 and January 2017) have already been distributed. The peak of the distribution process in 2017 is, as usual, June-August (70% of 2017 payments), with July being the highest month,” VTBC’s Zabotkin said.

This money is worth having and it is the biggest SOEs that could pay the most that are resisting the ministry the most successfully. Consequently there is a lot of uncertainty over a large sum of dividend money as we come into the high dividend season.

The largest contributors to the cash dividend stream from Russian companies in 2017 are Gazprom (FY16 payment: $4.0bn in total of which $1.9bn is due to the freely floating shares), Lukoil (1H16 payment (paid): $1.1bn/$0.5bn total/free float; 2H16 payment: $1.5bn/$0.7bn), Norilsk Nickel (9mo16 payment (paid): $1.2bn/$0.4bn; FY16 payment: $1.2bn/$0.4bn), Sberbank FY16 payment: $2.0bn/$1.0bn) and Alrosa (FY16 payment: $1.2bn/$0.4bn).

Russian companies continue to pay amongst the highest dividend yields of any emerging market with the 12-month forward looking dividend yield of 4.9% for the companies listed on the dollar denominated Russia Trading System (RTS) and 4.6% for Russian companies included in the MSCI Russia index. That compares with 2.7% for MSCI emerging markets index and 2.2% for the S&P500 index.

With the BoD meetings season starting in April, not much time is left for the authorities to work out a unified dividend decision. The consensus is that the powerful captains of state industry will probably get away with not paying the full whack once again. However, analysts are assuming that these companies will have to concede paying at least 25%.

“Since the new directive has not yet been issued, starting from January 1, 2017, SOEs are again required to pay not less than 25% of net income (as set out in the current regulations). Still, MinFin is maintaining its push for a 50% dividend payout. The most recent update on the SOE dividend theme came from the government meeting held by First Deputy Prime Minister Igor Shuvalov on 29 March, at which he suggested the ministries continue working on the matter, and further comments from MinFin on its intention to fix an IFRS payout base and 50% payout guideline separately in legislation,” Zabotkin said.


Top Dividend Payers next 12 months        
Company Next 16A 17F 18F
  12m DY DY DY DY
Russian Grids, pref. 18.50% - 5.70% 18.50%
Megafon, ord.* 11.40% 9.20% 12.00% 11.40%
Severstal, ord. 10.90% 8.30% 9.10% 10.90%
HMS, GDR 10.40% 7.60% 9.30% 9.30%
Rostelecom, pref.* 10.10% 6.40% 8.20% 10.10%
Alrosa, ord. 9.70% 2.00% 3.00% 9.70%
Aeroflot, ord. 9.60% - - 9.60%
NLMK, ord. 9.60% 5.70% 8.90% 10.50%
Globaltrans, GDR 9.50% - 5.40% 9.50%
MTS, ord.* 9.30% 10.60% 10.90% 9.30%
FSK, ord. 8.80% 1.10% 8.20% 8.80%
Unipro, ord. 8.50% 9.40% 11.10% 8.50%
LSR Group, ord. 8.30% 11.80% 10.90% 8.30%
Acron, ord. 8.10% 6.30% 8.90% 8.10%
Norilsk Nickel, ADR 7.70% 13.40% 6.70% 7.70%

* - Bloomberg consensus; NB: see full table in Appendix A; DY =

DPS/last price

Source: Bloomberg, Company data, VTB Capital Research