Russia is in the peak of the dividend season and if you haven’t already invested in one of these names, it is probably too late for the mid-year payouts. Still, Russia’s dividend stocks are currently a must-own for investors that are starting to dip their toes back in the Russian equity market; they have the highest dividend yield of any emerging market and these names have consistently outperformed the dollar-denominated Russia Trading System (RTS) index for years.

After a stellar 2016, which saw the RTS rise by just over 50%, this year has gone less well. The RTS is down 11% as of August 7 and its sister index, the ruble-denominated Moscow Interbank Currency Exchange (MICEX), is down 13%. However, Russian stocks are now so cheap that some investors have begun to bottom fish, betting the ongoing economic recovery will do enough for earnings to make Russian shares delivery a decent 15-20% return this year.

The MSCI Russia Index trades at a dividend yield of 5.4%, more than double the 2.5% for the MSCI EM Index. “Remarkably, Russia is just a few bps away from the highest dividend yield level in its history and trails only the brutal January of 2016 when it hit the record 5.7% and coincided with a multi-year trough of the Russian stock market. During the height of the global financial crisis end-October 2008, the MSCI Russia trailing dividend yield stood at 5.5, which is very much close to today’s levels too. The Russian flagship RTS index subsequently posted a one-year return of 155% from end-October 2008 and a 75% gain from end-January 2016,” said BCS in a note.

While there is still no generic “Russia story” to invest into – indeed, it has gotten worse in August after the US codified sanctions, cutting US President Donald Trump out of the loop – there are some very sweet cherries to pick that are doing well at the microeconomic level, and most of those pay high dividends.

“We see outstanding dividend yield in Russia as one of the key attractions of the market and believe top high dividend names will continue to provide alpha,” Russian brokerage BCS said in a note.

In the last year the dividend basket of top 5 names with highest yields of an average of 10.3% was made up of miner Norilsk Nickel (GMKN), mobile phone operator Mobile TeleSystems (MTSS), real estate developer LSR Group (LSRG) and diamond miner Alrosa (ALRS), which saw their share prices rise 5.2% in the first half of this year and beat the market by 18.3pp. These names have outperformed the index every year for the last seven years “by a serious margin,” says BCS.

The bank highlights Norilsk, MTS, LSR, oil company Lukoil (LKOH) and state-owned banking giant Sberbank (SBERP) as the best bets amongst the dividend stocks, which all pay over 6% yield and are also on a tear in terms of growth and earnings.

In the next tier down is mobile phone company Megafon (MFON), Moscow Exchange (MOEX) and Gazprom (GAZP), which are also expected to pay dividends with yields of 6% or more, but are doing less well as companies.

But the crest of the wave of the dividend story has probably just passed. Most of the companies that pay these generous dividends are going, or have already gone, ex-dividend now. July proved a strong month with the basket on average beating the market by 4.7pp, however, “historically the basket beat the index in the remainder of the year by only 4.4pp,” according to BCS.

Whether these companies will maintain their high dividend policy remains moot, as the economic slowdown and Russia’s political problems could make companies hoard more of their resources.

In particular the dividend policies of the biggest state-owned enterprises (SOEs) remain opaque. The Ministry of Finance and the economically liberal fraction in the Kremlin have been pushing hard for biggest companies to pay out 50% of their IFRS income as dividends to help cover a circa 2% budget deficit expected this year. But these companies are so well connected that it has proven imposable to force their chairman to comply with the order (which is included in the 2017 budget). The ministry is expecting to only receive about 40% of the dividends that it should get if the 50% of profits payout rule were enforced.

“The disappointing experience of ‘outguessing’ SOE dividends is set to continue in 2018, unfortunately, with management guidance proving the most reliable indicator (beware those not guiding),” BCS concluded.

 

Dividend expectations for most liquid Russian names
Stock	Price	Rec	12MF DPS	Currency	12MF DY, %	3M ADTV $mn
Enel Russia	1.12	HOLD	RUB	0.1	12.40%	0.2
Bashneft pref.	1164	-	RUB	135	11.60%	0.8
Norilsk Nickel	832.61	BUY	USD	93.6	11.20%	44.6
AFK Sistema	12.62	U/R	RUB	1.4	11.10%	7.9
MTS	237.55	BUY	RUB	26	10.90%	9.5
Unipro	2.42	SELL	RUB	0.2	10.00%	1.1
Alrosa	89.83203	HOLD	USD	8.9	9.90%	24.9
Rostelecom pref.	58.45	HOLD	RUB	5.4	9.20%	0.3
LSR Group	856.57	BUY	USD	78	9.10%	0.5
Federal Grid Co.	0.176	HOLD	RUB	0	8.70%	12.8
Aeroflot	204.25	BUY	RUB	17.5	8.60%	10.9
Tatneft pref.	287.112081	-	USD	22.8	7.90%	0.8
Rostelecom	71.88	SELL	RUB	5.4	7.50%	3.1
Moscow Exchange	107.6	HOLD	RUB	7.8	7.20%	16.9
Megafon	570.1	HOLD	RUB	40.3	7.10%	2
LUKOIL	2951.5	BUY	RUB	198	6.70%	34
Gazprom	122.7	HOLD	RUB	8	6.60%	75.5
NLMK	119.859301	SELL	USD	7.6	6.30%	12.6
MMK	34.892349	SELL	USD	2.2	6.20%	6.2
PhosAgro	2319.823373	SELL	USD	138.5	6.00%	1.5
Severstal	813.18443	SELL	USD	48.6	6.00%	10
Gazprom Neft	183.3	HOLD	RUB	10.9	6.00%	0.6
Tatneft	388.5	HOLD	RUB	22.8	5.90%	10.7
Sberbank pref.	125.01	-	RUB	7.2	5.80%	10.3
RusHydro	0.8119	HOLD	RUB	0	5.70%	8.5
Bashneft	2458	-	RUB	135	5.50%	0.2
Transneft pref.	159700	SELL	RUB	8,172.00	5.10%	28.3
Sberbank	148.96	BUY	RUB	7.2	4.80%	135.1
Moscow UTD	0.791	-	RUB	0	4.70%	0.1
Globaltrans	465.423	BUY	USD	21	4.50%	4.4
Inter RAO	3.7955	BUY	RUB	0.2	4.40%	7.2
UC Rusal (DR)	297.779073	U/R	USD	11.7	3.90%	0.6
VTB	0.064	SELL	RUB	0	3.40%	11.5
Bank St.Petersburg	59.5	BUY	RUB	1.8	3.10%	0.2
TMK	74.768977	BUY	USD	2.3	3.10%	0.8
NCSP	6.97835	-	USD	0.2	2.80%	0.4
NOVATEK	651.7	BUY	RUB	17	2.60%	9.7
Rosneft	327.2	BUY	RUB	7.7	2.40%	26.2
Surgutneftegas	26.705	SELL	RUB	0.6	2.20%	9.8
Rusagro	685.855	BUY	USD	14.6	2.10%	1
Surgutneftegas pref.	28.395	SELL	RUB	0.6	2.10%	11.7
RusGrids	0.811	SELL	RUB	0	1.80%	4
Magnit	9165	HOLD	RUB	120	1.30%	16.9
Source: Bloomberg, BCS

 

Key SOEs and their dividends
Company / Stock	Description	Rule applied	DPS, Rb	DY, %	DPS, Rb	Change, % y/y	DY, %
Rosneft	35% of IFRS	Official policy	5.98	1.8	7.74	29	2.4
Gazprom	25% of RAS (effectively 50% of adjusted RAS)	Slightly upped y/y	8.04	6.5	8.98	12	7.3
Transneft pref	25% of unspecified net income	100% of RAS	8172	5.1	7235	-11	4.5
Alrosa	>35% of IFRS	50% of IFRS	8.9	9.8	5.4	-39	6
Sberbank	20% of IFRS	25% of IFRS	6	4	7.2	20	4.8
Sberbank pref	20% of IFRS	25% of IFRS	6	4.8	7.2	20	5.8
VTB	>25% of IFRS to all share classes	>100% of IFRS (flat y/y)	0.00117	1.8	0.00216	85	3.4
Rostelecom	75% of FCF, but > Rb45bn in 2016-18	Official policy	5.39	7.9	5.83	8	8.6
Rostelecom pref	75% of FCF, but > Rb45bn in 2016-18	Official policy	5.39	10	5.83	8	10.8
Federal Grid	>10% of RAS net profit	35% of IFRS (adj for conn, non-cash)	0.015	8.7	0.015	-2	8.5
Russian Grids	>25% of RAS (adj for non-cash, one-offs)	2-3% of IFRS	0.006	0.8	0.021	241	2.6
InterRAO	up to 25% of IFRS mid-term	25% of IFRS	0.149	4	0.154	3	4.1
RusHydro	> 5% of IFRS	50% of IFRS	0.046	5.7	0.067	45	8.2
Aeroflot	25% of IFRS	50% of IFRS	17.5	8.2	9.1	-48	4.3
Source: company data, Bloomberg, BCS