LONDON - Russian firms are at last sharing more profits with shareholders in a dividend policy shift that may well encourage foreign investors after this weekend's presidential elections and finally narrow a valuation gap with emerging market peers.
Russian companies have historically been poor dividend payers even by the standard of emerging markets where the norm is to pay out less and invest more. At the huge state-run commodity firms in particular, capital spending has always trumped returning cash to investors.
But change may be afoot.
Russian dividend yields, the ratio of dividends to share prices, have in the past five years averaged 1.8 percent, roughly a quarter less than broader emerging markets. But in 2012 for the first time this will surpass the EM average, hitting 3.3 percent, Morgan Stanley predicts.
The yield at state-run Gazprom, Russia’s biggest company, will be more than 5 percent after it announced a doubling of dividends late last year. That’s higher than oil majors BP, Chevron and ExxonMobil and considerably above the near-zero yields available on Western government bonds.
Analysts point to the shift in policy at Gazprom as evidence of a change at the highest levels of Russian politics. An incipient mutiny among the urban electorate has added to pressure on Moscow to improve Russia’s image overseas in order to boost investment and demonstrate its economic competence.
The dividend trend will gather pace after the election, investors reckon, as the government tries to kick-start a $200 billion privatisation plan, crucial if it is to meet voters’ demands for less corruption and better services and jobs.
"Dividend payout ratios are improving in Russia and there are good reasons to believe they will increase for the rest of this year," said Matthias Siller, who helps to manage $3.9 billion in emerging European stocks at Baring Asset Management.
"The government is seeking to privatise large parts of the economy. How do you maximise the price you get for these privatisations? You show minority shareholders you will treat them fairly," Siller said.
At a recent presentation in London, Gazprom was at pains to stress its new dividend policy to investors, fund managers say.
Gazprom is not alone. Asset manager Allianz estimates Russian firms’ payouts to shareholders via dividends and buybacks rose 9 percent last year above the record set in 2008.
"We do expect that starting with a big player like Gazprom, others will follow," said Soren Beck-Petersen, investment director for emerging markets at HSBC Global Asset Management.
"We may see a lot of privatisation initiatives after the election and when this happens it will pressure them to raise dividend yields. (Yields) have been especially low for state-owned companies and this is a concern for foreign investors."
Russia is the biggest overweight in his EM portfolio.
PRESSURE TO REFORM
Lack of dividends – along with poor corporate governance – has severely depressed Russian share valuations. Over the past 10 years the market has traded at an average 25 percent discount to emerging markets on a price-to-earnings basis.
Political risks have pushed that gap to over 40 percent.
"These (dividend) developments will have a tremendous impact on multiples," Siller of Baring predicted.
Others seem to share this view. High oil prices have allowed successive Russian governments to dodge reform but now investors appear to view some kind of change as inevitable.
Moscow stocks have rallied 20 percent this year, with Russia-dedicated funds alone taking in $830 million, fund tracker EPFR Global says.
Oil’s price surge to 10 month highs has helped of course, as have opinion polls showing Vladimir Putin will seal a convincing return to the Kremlin with over 60 percent of the vote. That has allayed fears of violent post-election protests.
But the scale of the outsize equity rally is still remarkable, especially after December’s parliament vote led to widespread protests against Putin’s 12-year rule and triggered massive selling across Russia’s financial markets.
Shaken by the scale of protests, Putin has pledged sweeping reform and privatisations, to make Russia more attractive to investors and to cut reliance on oil.
Behind all this is also a conviction that time is running out for Russia’s economic model based on hydrocarbon revenues.
"I do think that given the recent protests and their significance, the chances of reforms taking place have improved," said Jose Morales, who helps manage $17 billion in emerging stocks at Mirae Asset Global Investment in New York.
He is overweight Russia, noting dividend and governance initiatives will boost share price valuations in the long term.
SCEPTICISM
Many are sceptical of the reform pledges, seeing Putin’s threats of clampdowns at state-run firms as election posturing.
Also, Russian dividend yields still compare unfavourably with markets such as South Africa and Czech Republic where companies are seen yielding over 4-6 percent in 2012, according to Morgan Stanley.
It notes moreover that Gazprom will pay 19 percent of its earnings as dividend versus payout ratios of 30-50 percent at South African firms. Like other state-run peers, capital expenditure is very high and dogged by allegations of waste and corruption.
John-Paul Smith, Deutsche Bank’s head of emerging equity strategy, is one of those who thinks the market has gone too far in discounting a post-election reform agenda.
"It’s difficult to present a bear case for Russia at the moment but I’d question how sustainable the rise in dividend yields will be," he said. "What we have seen is a high level of pro-cyclical investment in recent years so now there’s a lot of free cash flow generation, but that could easily change."
