Most of Russia’s state-controlled companies have refused President Vladimir Putin’s appeal to raise dividends, providing a fresh reason for investors to avoid the cheapest emerging-market stocks.
Russian stocks’ discount to the MSCI Emerging Markets gauge grew to 2.1 times net assets in May, the highest in four years, as 11 of 17 Kremlin-backed companies included in the benchmark Micex Index (INDEXCF) ignored the government’s November rule mandating a payout equal to at least 25 percent of net income. The Micex is down 9 percent this year, the worst performance of the BRIC markets after Brazil’s Ibovespa. (IBOV) State-controlled OAO Rosneft and OAO Inter RAO UES both fell more than 20 percent.
“The unrealized dividend promises have a negative impact on the market, especially since this was one of the key growth triggers,” Victor Bark, who oversees about $2.8 billion as the head of asset management at Alfa Capital in Moscow, said by phone on May 27. “This is bad news in a situation when there are no sources for economic growth.”
Putin has targeted dividends in a drive to boost budget revenue and lure foreign and domestic investors wary of an economy that grew at the slowest pace since 2009 in the first quarter. Capital outflows amounted to as much as $4 billion in April, according to the Economy Ministry.
The government’s payout push hasn’t been effective so far as some of the biggest companies resist trimming their cash piles after profits slumped last year, according to Pacific Investment Management Co. (PEQWX)’s Masha Gordon, who manages Pimco’s $581 million emerging-markets equities fund.
“An increase in dividend payout ratios of state-owned companies is a journey toward a policy goal and should be taken as such,” Gordon, who has a policy of avoiding Kremlin-backed companies, said by e-mail on May 24. “Time will show whether the government is effective in its ability to influence the outcome. Thus far, it has not been the case.”
Stocks in the Micex index trade at 5 times estimated earnings, the least among 21 emerging markets tracked by Bloomberg. This compares with 11 times for Brazil’s Ibovespa, 9.4 times for the Shanghai Composite Index (SHCOMP) and 14 times for India’s Sensex. (SENSEX) The Micex is valued at 0.7 times net assets, a drop from 0.8 times at the start of the year and compared with 1.5 times for the MSCI Emerging-Markets Index.
Most companies use local accounting rules to calculate dividends rather than paying them based on international accounting standards. The government has proposed making the use of international standards mandatory from next year, First Deputy Prime Minister Igor Shuvalov said May 23. The Micex fell 1 percent to 1,337.40 by the close in Moscow. The RTS Index tumbled as much as 2.1 percent, 20 percent below this year’s high, closing down 0.9 percent lower at 1,319.01.
Bigger payments would bolster companies’ market value as the world’s biggest energy exporter seeks to raise 427 billion rubles ($13 billion) from state asset sales this year, helping balance the budget after Putin increased spending on wages and pensions during his campaign last year for a third term.
Budget revenue from state companies’ dividends will drop 19 percent to 172 billion rubles ($5.4 billion) in 2013, according to a Finance Ministry document obtained by Bloomberg last month. Were the 25-percent rule followed in full, an additional 153 billion rubles would flow into state coffers, the ministry said.
While the government has weighed an increase in dividend payout requirements to 35 percent of earnings, Shuvalov said such rules are “unlikely” before 2015.
Putin isn’t the only emerging-market leader pressing publicly-traded companies to boost payouts. Polish Prime Minister Donald Tusk’s administration forced KGHM Polska Miedz SA, the nation’s state-controlled copper producer, to raise its dividend 67 percent more than what managers proposed.
Higher dividends “boost companies’ appeal, while providing the budget with extra revenue, which we really need,” Finance Minister Anton Siluanov said May 17.
Putin started the push for higher payouts last year, calling on the “necessity of increasing the efficiency of management among companies with state presence,” in part by discussing the “question of increasing dividend,” he told executives and government officials on July 10 in Moscow.
Russia’s economy grew 1.6 percent in the first three months of the year, slowing for a fifth consecutive quarter, Federal Statistics Service data showed on May 17, as the euro area’s longest recession hurt demand for commodity exports.
That is pressuring the budget deficit, which will widen to 0.6 percent of gross domestic product this year from about 0.1 percent of GDP in 2012, according to Finance Ministry estimates.
“Dividends are a natural instrument of budget revenue and the state’s interests here fully coincide with those of external shareholders,” Prosperity Capital Management’s Chief Investment Adviser Alexander Branis, who oversees $4 billion in Russian assets, said by phone on May 24. “The government will be forced to return to this because it’s feeling a shortage of income.”
The Micex’s 4.3 percent estimated dividend yield compares with 2.9 percent for the MSCI Emerging Markets Index. The gap hit a 4.5-year high of 1.5 percentage points in April and has narrowed 13 basis points since.
Pimco’s Gordon said she’s avoiding stocks such as OAO Gazprom, the natural-gas export monopoly, and OAO Transneft, the state oil pipeline operator, as they back down from paying higher dividends.
Gazprom’s board recommended a 2012 dividend 33 percent lower than the year before as profit slumped. While equal to 25 percent of net income based on domestic accounting rules, it’s equivalent to 12 percent of profit using international norms. Transneft, Russia’s oil-pipeline operator, may pay out 25 percent of net income based on international accounting standards only from 2017, a company official said on April 18.
Gazprom’s “gigantic” investment plans prevent it from paying more in dividends, according to Oleg Popov, who manages $1 billion in assets for Allianz Investments, the asset-management arm of Europe’s biggest insurer.
“The state is a shareholder in these companies and through dividends receives budget revenue, while a higher dividend yield makes the stock more popular with investors, helping privatization plans,” Popov said by phone from Moscow on May 28. “The government is heading in the right direction.”
VTB Group, Russia’s second-biggest bank, is considering 0.143 kopeks a share in 2012 dividend, equivalent to 17 percent of net income in international standards, the company said in a May 24 statement. OAO Sberbank, Russia’s largest lender, plans to pay a dividend equivalent to about 17 percent of net income, Chief Executive Officer Herman Gref said March 22.
Putin launched his dividend boost campaign last year by requesting Rosneft, Russia’s biggest oil producer, to consider raising its dividend payout to 25 percent of net income. Rosneft took heed, with the crude giant’s board recommended paying a quarter of profit to international standard in 2012 dividends.
That’s little consolation for shareholders of OAO TNK-BP Holding (TNBP), which Rosneft acquired for $55 billion in March. TNK-BP’s stock has plunged 30 percent this year as Rosneft Chief Executive Officer Igor Sechin said he won’t be responsible for dividends at the company he took over. Instead, Rosneft is seeking to borrow cash from its acquisition, curbing TNK-BP’s ability to pay other shareholders.
“The Russian corporate sector would do almost anything on earth to be seen as modern and transparent,” Eric Kraus, a managing director at Nikitsky Capital in Moscow, where he manages about $200 million in assets, said by e-mail on May 28. “Anything but pay fair dividends, respect minority interests in corporate transactions, or allow truly independent directors. There is a disconnect between the rhetoric and the reality.”
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