Opinion Independent Reports How to profit from Putin’s dividend plan (ERUS)...

How to profit from Putin’s dividend plan (ERUS) (RSX)

David Fessler, Investment U

2 Comments| October 15, 2013

Most income-oriented investors don’t have Vladimir Putin’s name in mind when searching for high-yield stocks. Perhaps they should.

In November 2012, Russia’s strong-arm leader began requiring that state-owned companies pay a minimum 25% of profit as dividends. The dividend plan, combined with the fact that Russian energy stocks are currently trading at bargain prices, makes for an appealing opportunity.

Although 11 of the 17 Kremlin-backed companies included in the MICEX (Bloomberg’s Russian stock index) have so far flouted the rule, one can ignore Vladimir Putin only for so long.

He is not taking no for an answer.

“We’ve started to take a tougher stance on companies’ dividend policy,” remarked Igor Shuvalov, Putin’s first deputy prime minister. Shuvalov is the man in charge of enforcement, and next year state-owned companies will need his approval for an exemption from the 25% payout rule.

Why the pressure? Larger dividends would mean higher market values for the state-owned companies.
Right now, they trade for peanuts. The MICEX trades at just 4.9 times estimated earnings. That’s the lowest of all 21 emerging markets tracked by Bloomberg.

A Little Corrupt

Russian stocks are so cheap because investors worry about the country’s reputation for corruption.

Russia ranks 133rd out of 176 countries on Transparency International’s 2012 index on corruption. Investor protection is always a concern when investing in Russia. Not surprisingly, conservative investors tend to give Russia a wide berth.

Still, for energy investors in particular, Russia is worth a hard look. Russia is the world’s largest producer of crude oil in the world outside of OPEC (at least until the United States overtakes it, perhaps by the end of the year). It pumps roughly 10.8 million barrels of oil per day.

It’s no slacker when it comes to natural gas either. It produces 2 billion cubic feet per day. Much of Russia’s natural gas heads to Europe. It’s also selling to China.

Russia’s inflation is relatively tame (6.5%) compared to other emerging markets. Its energy companies have a reputation for corporate profitability.

And a few Russian energy companies look like bargains, at least in the short term. Many Russian energy stocks have always traded for a song compared to their Western counterparts. Now, they’re trading at discounts relative to their own long-term averages.

But the biggest reason to invest in Russian energy stocks is Putin’s dividend plan. Russia is already the second-largest dividend payer overall in the WisdomTree Emerging Markets Equity Income Index.

It’s also the fastest growing. Russia regularly runs a trade surplus, fueled by oil. Since 2000, Russia has banked $509 billion in currency reserves. That’s the third-largest in the world.

Most of it’s from the sale of oil and natural gas. Its massive reserves are the main reason state-owned companies made it through the Great Recession of 2008-2009 unscathed.

Russia’s own ruble is a much stronger currency than those of many other emerging markets. High oil prices will continue to fuel the Russian economy.

Russian oil production could level off at the beginning of 2016. At that point, oil and gas company profits could begin to level off or even decline. But we’re interested in short-term opportunities.

How to Play It

Most investors might want to avoid individual Russian equities. A better way to invest in the country is through exchange-traded funds.

Right now, Russian ETFs look relatively cheap. The most popular Russian ETF is the Market Vectors Russia ETF (NYSE: RSX, Stock Forum). Energy makes up 44% of its portfolio of about 50 stocks.

If you want more exposure to energy, the iShares MSCI Russia Capped ETF (NYSE: ERUS, Stock Forum) might be a better bet. This ETF holds just 25 stocks. Energy makes up 55% of its portfolio.

Lately, many emerging markets have been struggling, with stock indexes facing mounting loses. In comparison, the Russian market has avoided much of the global selling pressure.

Russia’s fiscal position is solid. Its strong crude oil and natural gas exports will continue to add to its currency reserves, at least through 2015. And Putin’s policies are bullying, but dividend-seeker-friendly.

Taking all of the above factors into account, I believe Russia could be another energy outperformer, just like the U.S.

Tags: