MTS Trumping Emerging Peers on Dividend Appeal: Russia Overnight

OAO Mobile TeleSystems is trading at a premium versus its emerging-market peers for the first time since 2007 on prospects a new approach to dividends for the Russian phone company will deliver a more consistent payout.

The company known as MTS, Russia’s biggest mobile provider by market value, climbed 2 percent Feb. 22 in New York, extending its advance in February to 4.6 percent, the steepest gain on the Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. MTS trades at 12.8 times estimated earnings, a 33 percent premium to the MSCI Emerging Markets Telecommunication Services Index, from a discount of as much as 27 percent in November.

MTS will calculate dividends based on cash flow, rather than net income, as it’s “more transparent” amid ruble volatility, Chief Executive Officer Andrei Dubovskov said in November. The company’s 12-month gross dividend yield is 4.38 percent, versus 3.93 percent for OAO Rostelecom, Russia’s main fixed-line phone company. VimpelCom Ltd., which delayed its 2011 payout amid a shareholder conflict, yields 6.6 percent.

“MTS is the least risky and the most reliable dividend play in Russian telecoms,” Elina Kulieva, an analyst at OAO Alfa Bank who rates MTS hold, said by phone Feb. 22. “This new method is even more attractive for investors. It protects them from the risk of any decline in net income.”

The Bloomberg Russia-US gauge rose 0.9 percent to 101.76 Feb. 22, trimming its weekly drop to 1.1 percent. It was the index’s third consecutive weekly drop, the longest stretch of declines since August. Futures expiring next month on Russia’s RTS index rose less than 0.1 percent to 154,950 in U.S. hours.

Volatility Abates

The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund that holds Russian shares, rose 0.6 percent to $29.38 Feb. 22, cutting the weekly drop to 2 percent. The RTS Volatility Index, which measures swings in the index futures, retreated 1.4 percent to 19.06.

American depositary receipts of MTS rose to $20.56 in New York Feb. 22, capping the fifth week of gains in the past six to rally 1.9 percent. MTS’ valuation last exceeded that for the MSCI telecommunications index, which includes companies such as Mexico’s America Movil SAB and China Telecom Corp., in December 2007, when the premium was as much as 75 percent, data compiled by Bloomberg show.

MTS’ Moscow-listed stock rose 1.2 percent to 262.24 rubles, or $8.61, Feb. 22, to trim the shares’ first drop in 11 weeks. One ADR is equal to two ordinary shares. The company is scheduled to report fourth-quarter results March 19.

No Decision

The Moscow-based company, which has paid dividends of more than 10 rubles a share (33 cents) since 2008, has seen free cash flow increase to $1.7 billion in the past 12 months, from $1.6 billion in fiscal 2011, data compiled by Bloomberg show. Net income declined to $853.4 million in the past year, from 1.4 billion in 2011.

MTS hasn’t made a final decision on linking dividends to cash flow instead of profit, Nikolai Minashin, the company’s investment relations manager, said by e-mail from Moscow Feb. 22.

VimpelCom, Russia’s biggest mobile provider by subscribers in the fourth quarter, rose 2.9 percent to $12.13 in New York Feb. 22, trimming its drop last week to 1.1 percent. The Amsterdam-based company traded at 11.5 times estimated earnings, a 20 percent premium to the MSCI telecommunications gauge.

Russia’s anti-monopoly service barred VimpelCom from paying 2011 dividends in May amid disagreement over shareholder Telenor ASA, based in Fornebu, Norway, increasing its stake. The conflict was settled when Altimo Cooperatief U.A.’s billionaire owner Mikhail Fridman increased his holding of voting shares to 47.85 percent in October.

Adding Customers

VimpelCom, which got 40 percent of its revenue from Russia as of Sept. 30, plans to cut net debt by 17 percent by 2015 and shave $2 billion off spending, Chief Executive Officer Jo Lunder said in a Jan. 16 presentation.

MTS, which has 97 percent of its subscribers in Russia, Ukraine and Belarus, added mobile users at a faster pace than competitors in the fourth quarter, according to data from Advanced Communications and Media in Moscow. MTS gained 1.9 percent more subscribers in the quarter than in the July to September period, while Vimpelcom’s growth rate was 1.8 percent.

“MTS is a defensive play,” Ilya Balakirev, an analyst at UFS-Finance Investment Co. in Moscow, who rates MTS shares hold, said by phone Feb. 22. “The stock benefits from the company’s history of sustainable growth and guaranteed dividends.”

Oil Outlook

Concern the price of oil may fall from current levels and become more volatile makes MTS an attractive investment at the moment, according to Balakirev. Oil is Russia’s biggest export earner and along with natural gas makes up about 50 percent of budget revenue. Energy companies constitute almost 50 percent of stocks on the nation’s benchmark Micex Index.

Crude oil fell in New York for the second time in three weeks. Oil for April delivery rose 0.3 percent to $93.13 the New York Mercantile Exchange Feb. 22, reducing the weekly drop to 2.8 percent, the most since the seven days ended Dec. 7.

Brent oil for April settlement climbed 0.5 percent to $114.10 a barrel on the London-based ICE Futures Europe exchange, paring the weekly drop to 3 percent. Urals crude, Russia’s chief export blend, slipped 3.5 percent last week, the most since December.

Oil prices in New York will probably fall this week, according to a Bloomberg survey. Twenty of 30 analysts and traders, or 67 percent, estimate crude will drop through March 1. Five respondents, or 17 percent, predicted a gain. Five said there would be little change.

Ruble Swings

The ruble strengthened 0.2 percent to 30.4225 per dollar Feb. 22 and gained 0.2 percent to 34.7749 against the dollar-euro basket used for minimizing swings that hurt exporter competitiveness. Ruble futures showed the currency little changed at 30.521 per dollar.

Three-month implied volatility on the ruble averaged 12 percent in 2012, up from 4.6 percent in 2007, when the central bank exercised greater control over the currency. Bank Rossii, which still intervenes in the ruble, is targeting a free float of the currency by 2015, according to its website.

United Co. Rusal, the world’s largest aluminum producer, lost 0.2 percent to HK$4.51 in Hong Kong trading as of 11:05 a.m. local time. The MSCI Asia Pacific Index rose 0.3 percent.

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