Article / 16 May 2017 at 10:00 GMT

In Russia, dividends are a political business

Russia oil and gas expert
United Kingdom
  • Russian state oil companies have found excuses not to obey 50% dividend rule
  • State-controlled companies likely to get away with non-compliance in 2017-18
  • Excess profits will remain with the companies, out of reach of the government
  • Market seems well aware of Russian oil companies' game on dividends
  • Compliant Lukoil has been rewarded with substantial share price outperformance

Moscow nternational Business Center
Aerial view of Moscow International Business Centre. Photo: Shutterstock


By Nadia Kazakova

There was much excitement about Russian dividends around a year ago when the government decreed that the state-controlled companies should pay out half of their International Financial Reporting Standards net income. The companies found various excuses not to comply. 

This year, the justification for a sub-50% payout is that companies are simply running low on cash. President Vladimir Putin has all but officially endorsed such a position, pointing at Gazprom. He said Gazprom reported a large paper profit under IFRS, but it did not reflect the real cashflow. Hence the dividend payout for 2016 would need to take into the account the predicament.

The problem with Gazprom is not paper income as such. It is not even swings in FX losses or gains. It is the squeeze on operating margins in 2016 as oil and gas prices fell and rouble costs rose during the year. The smaller operating cashflow was then used to financed over a trillion roubles in capex. Whatever remained as the free cashflow was spent to buy a large chunk of the company's own shares from VTB in July 2016. No surprise then, there is not much “real cash” left.

Rosneft has also ignored the 50% rule and announced a payout of 35% (as per its dividend policy) on its much reduced income for 2016. It is a disappointment as investors must have expected a more generous disbursement after the 2016 privatisation (or rather what looked like an under-cover sale to Glencore and the Qatar Investment Authority). They would need to wait until at least the interim 2017 dividend for any improvement in income and dividend payout.

Theoretically, the problem of various one-off adjustments to net income could have been easily solved by using comprehensive (rather than reported) income from the IFRS statement. That would adjust for one-off items, including FX fluctuations. It would definitely have improved the dividend for Rosneft and SurgutNG shareholders. 

Dividends, reported and adjusted net income, RUB per share and change, % y/y

x
 
Sources: companies' financial results, author's estimates. Note = * SurgutNG numbers are based on unconsolidated Russian accounting standards. Both Lukoil and Novatek pay interim dividends.

The state-controlled and state-linked companies, however, have been and would be allowed to get away with non-compliance this year and, most likely, next year. The excess profit will remain with the companies and out of reach of the Russian government. It would be easier to direct the funds to various worthy projects. Especially in the run-up to presidential elections of 2018.

Lukoil stands out of from the rest of them, showing up the proverbial two fingers. There is little reason for the company not to distribute income as dividend. Lukoil, unlike Gazprom and Rosneft, has managed to increase its free cashflow in 2016 despite a fall in net income. The main reason is a drop in capex spent (same with Novatek, but it decided to hold on to the cash).

SurgutNG reported a net loss under unconsolidated Russian accounting standards. It is hard to read incomplete accounts, but it looks like the company would have had an increase in free cashflow if not for a massive one-off payment.

SurgutNG still sits on a massive RUB 2,187 billion/$36 billion of financial assets as of the end of 2016, but clearly it is not viewed as a reservoir to pay dividends. The company's preferred dividend was cut to RUB0.6 per share for 2016 from RUB6.92 for 2015.

Free cash flows and dividends, RUB billions and change, % y/y
x
 
Sources: companies' financial results, author's estimates. Note = * SurgutNG numbers are based on Russian accounting standards.

The market seems well clued in to Russian oil companies' game on dividends. Lukoil's desire to play it straight on dividends has been rewarded with substantial share price outperformance over the last 12 months. 

Dividend yields and oil companies' share price performance over 12 months, %
x
 
Sources: quote.rbc.ru, companies' financials. Note: Novatek is ex div, Lukoil's final dividend (ex interim) is RUB120/share.

Unless Rosneft marks Lukoil as its next acquisition target (which might not necessarily be good news for Lukoil shareholders), the chances are that Lukoil would continue to behave in an apolitical – some might say un-Russian – manner, simply making money and paying dividends in the following 12 months.

Russian oilfield infrastructure
 Russian oilfield infrastructure. Photo: Shutterstock


— Edited by John Acher

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector

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