Russia’s spring dividend stock season is open

Russia’s spring dividend stock season is open
Russia's equity market is up 9% YTD as of the end of February
By Ben Aris in Berlin February 26, 2018

Spring is coming, when investors start to think about Russian dividend stock again. Over the last five years companies that pay high dividends have been a no-brainer investment, easily outperforming the wider market.

The BCS Global Markets top 5 dividend basket beat the index in 2017, returning a thumping 30% in dollar terms vs a 2% loss for the dollar-denominated Russia Trading System (RTS) index as a whole.

“In view of the market’s very strong start to 2018, we advise allocating more into high-dividend stocks, seeking to smooth total equity return with cash received in the form of dividends,” said Vyacheslav Smolyaninov, BCS GM’s deputy head of equity research.

Russian stocks continue to pay the highest dividends amongst the world’s major equity markets: currently average dividends yields are 6%, more than double the MSCI EM average.

Seasonality effects also make this the time of year to be thinking about taking a punt on Russian equity: between the Christmas break and Easter the Russian stock market usually returns some 20% every year as index-tracking funds allocate new funds and cash flows back into the economy following heavy tax bills that come due at the end of each year. The spring bump is usually brought to an abrupt end at Easter when funds have to report and take profits.

After a lackadaisical 2017, portfolio investors are looking forward to a better 2018. Emerging markets (EM) in general easily outperformed their developed markets (DM) peers, returning just under 32%, but not Russia. That is despite the end of a two-year recession and growing profits amongst the leading Russian corporates. 

The RTS Index has added 9% this year to date to 1,263, a solid result compared to other EM markets, with the MSCI EM gaining 2%. Only Brazil performed better (+12%), while China increased just 4%, while Turkey, India and South Korea were nearly flat, and South Africa declined by 4%.

The worst-performing sector year to date is consumer (+1.2%), a result of supermarket chain Magnit’s decline (-29%). The top-five best performers are Yandex (+29Y YtD), Raspadskaya (+21%); Mail.Ru (+21%), Tatneft (+19%) and Sberbank (+19%). The worst performers are Magnit (-29%), Polymetal (-9%), Rusal (-4%), PIK (-3%) and Mechel (-2%).

The list of companies that are offering generous dividends has not changed that much but there have been a few adjustments since last year’s season.

A solid performance suppressed the dividend yields of real estate developer LSR Group (LSR), as well as oil and gas companies Lukoil and Gazprom, to below 6%. Russia’s national airline Aeroflot also left the list of high paying stocks as its performance fell off last year following several years of sterling expansion.

The shares of real estate developer Etalon and Tinkoff Bank are the two newcomers to the top dividend tips. The real estate sector is recovering, especially the residential sector, driven higher by recovering income levels and the boom in mortgage lending. And Tinkoff’s “lifestyle bank” is making it Russia’s “other financial stock” after the state-owned retail banking behemoth Sberbank.

Sberbank is loved for its sheer size and profitability, but it too has been increasing its dividends and has now been included (just) in BCS GM’s preferred dividend stocks.

“Sberbank commons are our top pick and we like preferreds too, although we have no formal recommendation,” Smolyaninov says.

Dividend expectations for most liquid Russian names
Name  recommend Price, RUB/s 12MF DPS, RUB 12MF DY 3M ADTV $mn
Norilsk Nickel (DR)  HOLD  1,140 127 11.1% 57.7
Tatneft pref.  392 38.7 9.9% 1.2
Enel Russia  HOLD  1.55 0.14 9.2% 0.5
MTS  BUY  290 26 9.0% 8
Rostelecom pref.  HOLD  58.2 5.2 8.9% 0.4
NLMK  SELL  151 13.5 8.9% 7.6
Severstal  SELL  945 84 8.9% 12.9
AFK Sistema*  U/R  12.7 1.11 8.8%*  6.6
Unipro  SELL  2.55 0.22 8.6% 0.8
Federal Grid Co.  SELL  0.16 0.014 8.6% 4.1
MMK  SELL  44.67 3.54 7.9% 14.7
Rostelecom  SELL  66 5.2 7.9% 5.3
RusHydro  HOLD  0.76 0.06 7.9% 7
Megafon  HOLD  526 40.3 7.7% 4.8
Detsky Mir  BUY  98.4 7.47 7.6% 0.5
Tatneft  HOLD  529 38.7 7.3% 12.3
Etalon Group  BUY  182 12.6 6.9% 3.8
ALROSA  SELL  76.7 5.24 6.8% 16.6
Moscow Exchange  HOLD  113 7.7 6.8% 18
Aeroflot  U/R  141 9.2 6.5% 18
TCS Group  BUY  1,077 70.2 6.5% 4.7
M Video  405 25 6.2% 2.7
Globaltrans  HOLD  567 34.8 6.1% 1.8
Surgutneftegas pref.  SELL  29.6 1.8 6.1% 8.4
Sberbank pref.  201 12.1 6.0% 12.6
LSR Group  BUY  858 50 5.8% 0.6
Gazprom  HOLD  145.3 8.11 5.6% 60.2
Gazprom Neft  BUY  259 14.1 5.4% 0.9
LUKOIL  BUY  3,862 201 5.2% 34.7
Acron  SELL  4,174 212 5.1% 0.2
Sberbank  BUY  240 12.1 5.0% 159
Rusagro  BUY  588 28.3 4.8% 0.6
Inter RAO  BUY  3.46 0.16 4.7% 3.6
VTB  HOLD  0.051 0.0022 4.2% 15.5
UC RUSAL  BUY  40.8 1.66 4.1% 10.6
Rosneft  BUY  318 12.5 3.9% 20.7
NCSP  8.3 0.28 3.4% 0.2
RusGrids  SELL  0.82 0.026 3.2% 3.2
Bank St.Petersburg  BUY  59.1 1.84 3.1% 0.2
Magnit  BUY  6,400 199 3.1% 38.8
TMK  BUY  77.2 2.23 2.9% 0.6
NOVATEK  BUY  687 19.2 2.8% 7.6
O'Key  BUY  148 3.4 2.3% 0.3
Surgutneftegas  SELL  29.2 0.65 2.2% 5.2
Transneft pref.  SELL  182,500 3,824 2.1% 5.8
X5 Retail Group  BUY  2,282 28.3 1.2% 21.1
PhosAgro  SELL  2,539 29.2 1.1% 1.2
* High uncertainty Source: Bloomberg, BCS GM 
Source: Bloomberg, BCS GM

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