Russia’s summer dividend payout season is over so it's time for investors to look forward to the next one. High yielding dividend stocks have been consistent index-outperformers nearly every year since 2014 and so the list of generous companies is the first list investors look at when making equity investments in the Russian stock market.

Russia’s stock market had a stellar year in 2016, returning over 50% to portfolio investors, who had decided prices were simply too cheap to ignore. Also of help was the end-of-year “Trump bump” on speculation that the newly elected US president might make an early move to withdraw sanctions..

The market has done less well this year selling off by about 15% in the first quarter, but as Russia’s economic recovery gathers momentum, albeit modestly, investment into the best names has been trickling back.

The ruble-denominated Moscow Interbank Currency Exchange (MICEX) is down YTD by 7%, while its sister index, the dollar-denominated Russia Trading System (RTS), is down by 3% since the start of the year. Most analysts believe the index will continue its slow recovery and could return 10%-15% by the end of this year.

One clear sign of the growing interest in Russian stocks is the reappearance of IPOs. In the last few weeks Russian oligarch Oleg Deripaska got the first London-based IPO in five years away with the listing of his EN+ energy holding and prior to that Russian footwear maker Obuv Rossii also held a successful IPO. Its flotation in Moscow raised $105mn in the process. Investment banks speculate that next year there will be more than a dozen IPOs and SPOs.

And while the index’s performance has been lackadaisical, at a corporate level some stocks have been flying. The crisis of the last few years has been a mixed blessing; it has benefited the biggest and cash-rich companies that have consolidated their position in the market at the expense of their weaker rivals. They have seen their share prices soar as a result.

Many of these better-off companies have been sharing their windfalls with their shareholders and returning profits via generous dividend payments. Russia continues to pay some of the best dividends in the world. The MSCI Russia index was trading with an average dividend yield of 5% as of the start of November - more than double the mere 2.3% for the broader MSCI EM index.

The steel sector has been doing particularly well this year thanks to rising prices and Novolipetsk Meatllurgical Kombinat (NLMK) is expected to pay one of the highest dividend yields in the market of 10% of profits over the next 12 months, according to BCS.

“We have revised upwards our frontload dividend estimates for the company following its strong performance in 3Q17 as key positives were delivered on the FCF and dividend side. FCF surged by 64% q/q to $533mn, mainly on a stronger than expected working capital release,” the broker said in a note. Rival steel mill Severstal is also expected to pay a dividend yield in the double digits, making the two names top picks in the sector.

Even companies that have had a tough quarter like Aeroflot, long an investors’ darling, are still paying handsome dividend yields even if their results are weaker. Aeroflot just put in weak third quarter results, but even though its dividend yield will fall, it will fall from a heady 9% to 8% over the next year, say analysts.

Looking through the list of companies expected to pay more than 5% dividend yields over the next 12 months the other company category that jumps out is utilities, led by Enel Russia. This is probably going to be the story for next year as many of the utilities have finished their capex programmes and so are sending more of their profits to shareholders as a result.

 

Russian 12 month dividend expectations >5%
Stock	Price, RUB/s	12MF DY
Enel Russia	1.3	11.2%
Severstal	911	10.9%
Rostelecom pref.	53	9.7%
Norilsk Nickel (DR)	1,126	9.6%
NLMK	134	9.5%
AFK Sistema*	13.1	9.1%*
MTS	288	9.0%
Federal Grid Co.	0.16	8.7%
Aeroflot	165	<8.0%
Tatneft pref.	319	7.7%
Rostelecom	68	7.6%
RusHydro	0.81	7.4%
Unipro	2.57	7.4%
Gazprom	127	6.9%
Megafon	589	6.9%
LUKOIL	3,145	6.7%
Globaltrans	547	6.7%
MMK	44	6.6%
Moscow Exchange	118	6.5%
LSR Group	817	6.1%
Etalon Group	235	5.7%
Rusagro	694	5.6%
Tatneft	444	5.5%
Alrosa	78	5.2%
* High uncertainty  Source: Bloomberg, BCS