Russian government tweaks 50% dividend payout rule for state companies

Russian government tweaks 50% dividend payout rule for state companies
Russia's Prime Minister Mikhail Mishustin signed a new order on dividend payments for state companies, which tweaks the 50% of IFRS net profit payout rule
By bne IntelliNews June 17, 2021

Russia's Prime Minister Mikhail Mishustin signed a new order on dividend payments for state companies, which brings clarifications to adjusted net income calculations for paying at least 50% of IFRS net profit, Izvestia reports.

This was expected, as in 2020 the Finance Ministry reiterated that it would continue to maintain strict dividend discipline for state-owned enterprises (SOEs), keeping the 50% of IFRS net profit rule and switching to adjusted net profit as the basis of the calculation.

As followed by bne IntelliNews, in 2019 the ministry succeeded in forcing the 50% payout ratio on almost all the country's largest corporations, such as Rosneft, Transneft, state-controlled banks Sberbank and VTB, and others.

The new changes to the rule touch upon correcting for primary paper gains and losses, as well as for the changes in the fair value of fixed assets and on foreign currency gains and losses.

Although this has not been confirmed, BCS Global Markets analysts believe that the new rules would likely affect Russia's largest oil producer Rosneft more than other Russian oil & gas companies. 

"Rosneft currently pays 50% of book net income as reported under its IFRS accounts, but makes no adjustments for non-cash items such as FX gains and losses," BCS GM reminds, noting that this causes significant volatility in Rosneft’s reported net income each year, removing $4.4bn from net income in 2020, for example. BCS GM see the news as positive for Rosneft's shares and maintain a Buy rating on the name.

Sova Capital on June 17 note that Russian oil pipeline operator Transneft could have a slightly positive effect on dividends from new rules, as it will have to count in the contribution of associates to dividends.

Russia's gas giant Gazprom has already been adjusting for FX, impairments and profit from associates. However, while the companies of its utility arm Gazprom Energoholding are already paying out at least 50% of IFRS net income, it remains "somewhat unclear... what impact associates will have on Gazprom's total dividends going forward given the vague language in the new order," Sova analysts note.

Russian utility major InterRAO currently has to pay out no less than 25% of IFRS net income. "However, the government indirectly controls InterRAO via Rosneftegaz (28%), Federal Grid Company (9%) and treasury stock (30%)," Sova notes, which could give InterRAO’s dividend policy more flexibility compared to entities directly controlled by the state

At the same time, Inter RAO is also preparing to execute large investment projects for Vostok Oil, as well as a potential project to replace steam turbines with gas turbines. 

Sova Capital analysts believe that the company could increase its dividend payout to 50% if InterRAO is the only developer in building Vostok Oil’s infrastructure and does not have to take heavy capex on its balance sheet. Should the payout ratio increase, InterRAO's dividend yield forecast for 2021 could double from 3.7% to 7.4%. 

Hydropower holding RusHydro currently pays out 50% of unadjusted IFRS net income, and previously already mitigated the impact of potential one-offs by introducing a dividend floor of the average dividend payout for the previous three years. Sova Capital expects RusHydro's dividend yield to rise from 6.3% in 2020 to 8.9% in 2021, mainly thanks to an impairment-free 2021. 

As for Russian Grids (Rosseti), its "dividend solutions are not transparent, and the company’s precise dividend calculation has never been disclosed," Sova writes, reminding that the official dividend policy is to calculate the first 50% of adjusted IFRS and RAS net income and to pay out the larger of the two. 

"We think the probability that Rosseti will pay in line with a recent government decree is very low, as the parent company’s actual cash proceeds for 2020 (dividend flows from subsidiaries) accounted for 48% of consolidated IFRS net income in 2020," the analysts believe. 

The grid operator also unexpectedly lowered its dividends for 2020 by 72%, with a current DY of only 1.8%. Moreover, Rosseti and the Finance Ministry have already confirmed that it will have a special dividend calculation, according to Interfax.

The subsidiary of Rosseti, the Federal Grid Company (FSK), dividend policy also stipulates calculating 50% of adjusted IFRS and RAS net income and paying out the larger of the two. FSK has an effective payout ratio that is below 50%, in particular 35% of IFRS net income for 2020. 

"The company is preparing to increase its capex for BAM and Transsib, and it could protect its current conservative dividend policy," Sova Capital believes.  Assuming a dividend payout for 2021 of 50% of IFRS net income that does not include the depreciation adjustment, the expected dividend yield for 2021 could increase from the anticipated 7.1% to 13.1%, the analysts estimate.

Sova Capital maintained Buy ratings on shares of Gazprom, Transneft, InterRAO, RusHydro and FSK, a Hold rating on RosSeti ordinary and a Sell rating on Rosseti's preferred shares.