Russian stocks are paying the highest dividend yields in the world with an average of 5.5%, and the stocks of the most generous companies handsomely outperform the leading indices. With peak payout season nearly on us investors are shopping for the bargains.

Russian companies are expected to pay 20% more in dividends this year than last or RUB1.83 trillion ($30bn), VTB Capital estimated in a special report on May 22.

"Between now and YE18, they [Russian listed companies] are to offer RUB1.60 trillion, with the main flow in the summer, when the final 2017 dividend distribution season starts," the bank said in the report that was released in May.

And it is not too late to buy: BSC Global Markets found in a study that buying dividend paying stocks two to four weeks before they went ex-dividend produced statistically significant extra returns in previous years. Currently BCS’s dividend basket of names is up 17% YTD, which is 13 percentage points ahead of the dollar denominated Russia Trading System (RTS) index.

The same is true for the overall index. In addition to the plain vanilla RTS index, the Moscow Exchange (MOEX) calculates several indices including the RTS Total Return index, that includes returns from dividend payments as well as two more versions of the same that take into account tax payments. Since the start of the year the RTS TR index is up 17% more than the simple RTS index; inbound investors are buying the dividend yielding stocks before they buy anything else.

“Starting from the beginning of 2016, the benefit of the RTS Total Return Index verses the RTS Index has been growing constantly and currently the difference is now over 17% and we are not yet through this year’s dividend season,” MOEX said in a note to clients.

The traders at BCS must be feeling pleased with themselves after recommending investors to “buy the panic” in April after the US Treasury Department (USTD) slapped a new and damaging round of sanctions on some of the biggest businessmen in Russia.

BCS has a dividend basket product where the average dividend yield is an extraordinary 10.5% at the moment.

The dividends are a function of how much extra cash a company has to share with its shareholders and with Russia’s economy on the mend those companies have more cash to share.

BCS reassessed its portfolio and upgraded the companies that are expected to improve the amount they pay as dividends. “The largest upgrades were for Severstal (34% vs the previous estimate on better fundamentals), Aeroflot (23%, company decision on dividends), Etalon Group (18%, also a positive company decision), NLMK (12%, on strong fundamentals) and Norilsk Nickel (9% on high metals prices),” BCS wrote in a note.

Severstal is top dog at the moment with a 13.2% dividend payout that made its owner Alexei Mordashov Russia’s richest man until recently, when he was overtaken by Mikhail Lisin for the title, the owner of another steel plant Novolipetsk Metallurgical Kombinat (NLMK) that is also a top 10 dividend payer.

A Russian metals major, NLMK saw its earnings hit a ten-year high after it posted $2.8bn in revenues for the first quarter of 2018, Ebitda of $812mn and net income of $502mn, leading it to promise bumper dividends.

Polyus has been returned to the basket after the board recommended paying out a total of $550mn of dividends, including interim payments, which is in line with the policy of paying 30% of annual Ebitda a year. The stock has been hot as the company has been trading at a discount to its global gold-producing peers even before considering its dividend yield.

Despite all the good news there is still not a lot of clarity over what the biggest state-owned enterprises (SOEs) will do – but it is clear that few will fulfil the Ministry of Finance order to pay out half their profits as dividends.

At least the state-owned retail banking giant Sberbank has been making an effort. The bank has been responsible for the entire banking sector’s profit on its own for several years and has increased its dividend payments from 25% in 2016 to 36% for the 2017 payout. The bank made a record-high net profit of RUB749bn and will pay RUB271bn ($4.4) in dividends, doubling the 2016 payout of RUB135bn in absolute terms. "I think [Sberbank shares] were one of the most profitable investments of last year," Gref boasted in April.

Gazprom is another one that is dodging the 50% dividend order, claiming that it needs to spend extra cash on several huge pipeline projects. The company had a weak 2017 posting negative free cash flow but has had a much stronger first quarter this year on the back of high demand in Europe. The lack of dividends are another aspect of the scandal that broke after Sberbank analyst Alex Fak claimed that Gazprom has spent $93bn on infrastructure projects that benefit no one but the contractors – all friends of President Vladimir Putin. Fak was promptly fired for calling it like it is.

The situation at Rosneft, the state’s other massive hydrocarbons company is better as the company is pledging to cut its record-high debt burden to investors in an effort to improve its valuation and said in April that it will pay out 505 of profits as dividends – but has some conditions.

The company will pay RUB6.65 per share, which comes on top of the RUB3.83 per share the company has already paid for the first half of 2107. The total shareholders will receive for 2017 becomes RUB10.48 per share, which is half of the company’s net profit for 2017. The caveat is the dividends will be paid to the company’s holding company parent Rosneftegaz, which is also chaired by Rosneft CEO Igor Sechin. Russian Finance Minister Anton Siluanov complained that while technically the company has fulfilled the order, the money gets stuck at the holding company level and never reaches the budget.

Other state-owned flagship companies such as Aeroflot and Transneft have also said they will pay out 50% and now investors are awaiting their AGMs to see if they hold to their word.

The other major group of companies near the top of the dividend yield table are from real estate and include LSR Group and Etalon Group, which are benefiting from the economic recovery and rising incomes.

The board of LSR Group recommended a “solid” 2017 dividend payout at RUB78 per share, which is a dividend yield of 9.3%, beating the estimates by 10%, BSC Global Markets commented on May 31.

And after Etalon posted 61% year-on-year net profit boost to RUB7.9bn ($130mn) in 2017 it is also expected to stick to its policy of paying out 40%-70% of profits with the consensus saying it will pay 50%.

However, it has not gone well for everyone. The London-listed AFK Sistema board of directors cut its dividends in half (47%) despite boasting a healthy recovery in first quarter profits. The company is still recovering from a bruising corporate war with state-owned oil major Rosneft last year that cost it $1.76bn in an out of court settlement and contravenes the company’s otherwise generous dividend policy.

Dividend expectations for most liquid Russian names
Stock	Rec	Price, RUB/s	12MF DPS, RUB	12MF DY	3M ADTV $mn
Severstal	SELL	1,033	136	13.2%	12.1
Norilsk Nickel	BUY	11,644	1,258	10.8%	33.8
Enel Russia	U/R	1.44	0.14	10.1%	0.68
MMK*	SELL	49.2	4.73	9.6%	6.4
MTS	BUY	286	27.3	9.5%	8.4
NLMK	SELL	172	15.7	9.1%	10
LSR Group	BYU	860	78	9.1%	0.31
Tatneft pref.	-	462	41.7	9.0%	1.6
Aeroflot	BUY	145	12.8	8.8%	13.7
VEON	HOLD	145	12.5	8.6%	14.4
Etalon Group**	BUY	177	15.1	8.5%	0.5
VTB	-	0.047	0.0038	8.1%	24.5
Federal Grid Co.	SELL	0.185	0.015	8.0%	4.4
Detsky Mir	BUY	94.2	7.5	8.0%	0.63
Globaltrans	BUY	649	51.3	7.9%	1.6
Rostelecom pref.	HOLD	64.9	5.1	7.8%	0.35
Unipro	SELL	2.89	0.22	7.7%	1.2
Rostelecom	SELL	71	5.1	7.1%	3.7
Polyus	BUY	3,941	277	7.0%	4.3
Moscow Exchange	-	111	7.8	7.0%	13.6
TCS Group	-	1,297	83	6.4%	3.7
Acron	SELL	4,389	275	6.3%	0.48
Tatneft	SELL	668	41.7	6.2%	18.4
Sberbank pref.	-	193	12	6.2%	21.8
ALROSA	SELL	92	5.24	5.7%	15.2
Sberbank	-	216	12	5.5%	257
Gazprom	HOLD	146	8.04	5.5%	58
Polymetal	SELL	560	28.7	5.1%	2
LUKOIL	BUY	4,250	215	5.1%	52.5
Gazprom Neft	HOLD	327	16	4.9%	1.1
NCSP	-	6.5	0.31	4.8%	0.11
Magnit	BUY	5,030	241	4.8%	27.3
Inter RAO	BUY	4.2	0.19	4.6%	7.3
AFK Sistema	BUY	10.2	0.46	4.5%	3
Rusagro	BUY	704	31.2	4.4%	0.25
Transneft pref.	SELL	175,000	7,578	4.3%	5.3
Surgutneftegas pref.	SELL	32.3	1.38	4.3%	11.2
EVRAZ	SELL	429	17.5	4.1%	22.5
RusHydro	HOLD	0.7	0.026	3.7%	5.3
PIK Group	SELL	333	12.4	3.7%	4.8
PhosAgro	SELL	2,306	85	3.7%	1.2
X5 Retail Group (DR)	BUY	1,756	64	3.6%	22.1
Rosneft	BUY	380	12.7	3.3%	35.1
TMK	BUY	83	2.3	2.8%	0.32
O'Key	BUY	143	3.7	2.6%	0.12
NOVATEK	BUY	848	19.6	2.3%	11.6
Surgutneftegas	SELL	29.3	0.65	2.2%	7.5
RusGrids	SELL	0.8	0.018	2.2%	2.9
*Ex-divi today **12MF DY may technically rise to 17% if ETLN returns to standard schedule Source: Bloomberg, BCS GM