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|
|Federal Grid Co.||SELL||0.16||0.014||8.6%||4.1|
|X5 Retail Group||BUY||2,282||28.3||1.2%||21.1|
|* High uncertainty Source: Bloomberg, BCS GM|
|Source: Bloomberg, BCS GM|