Spring is coming, when investors start to think about Russian dividend stock again. Over the last five years companies that pay high dividends have been a no-brainer investment, easily outperforming the wider market.

The BCS Global Markets top 5 dividend basket beat the index in 2017, returning a thumping 30% in dollar terms vs a 2% loss for the dollar-denominated Russia Trading System (RTS) index as a whole.

“In view of the market’s very strong start to 2018, we advise allocating more into high-dividend stocks, seeking to smooth total equity return with cash received in the form of dividends,” said Vyacheslav Smolyaninov, BCS GM’s deputy head of equity research.

Russian stocks continue to pay the highest dividends amongst the world’s major equity markets: currently average dividends yields are 6%, more than double the MSCI EM average.

Seasonality effects also make this the time of year to be thinking about taking a punt on Russian equity: between the Christmas break and Easter the Russian stock market usually returns some 20% every year as index-tracking funds allocate new funds and cash flows back into the economy following heavy tax bills that come due at the end of each year. The spring bump is usually brought to an abrupt end at Easter when funds have to report and take profits.

After a lackadaisical 2017, portfolio investors are looking forward to a better 2018. Emerging markets (EM) in general easily outperformed their developed markets (DM) peers, returning just under 32%, but not Russia. That is despite the end of a two-year recession and growing profits amongst the leading Russian corporates. 

The RTS Index has added 9% this year to date to 1,263, a solid result compared to other EM markets, with the MSCI EM gaining 2%. Only Brazil performed better (+12%), while China increased just 4%, while Turkey, India and South Korea were nearly flat, and South Africa declined by 4%.

The worst-performing sector year to date is consumer (+1.2%), a result of supermarket chain Magnit’s decline (-29%). The top-five best performers are Yandex (+29Y YtD), Raspadskaya (+21%); Mail.Ru (+21%), Tatneft (+19%) and Sberbank (+19%). The worst performers are Magnit (-29%), Polymetal (-9%), Rusal (-4%), PIK (-3%) and Mechel (-2%).

The list of companies that are offering generous dividends has not changed that much but there have been a few adjustments since last year’s season.

A solid performance suppressed the dividend yields of real estate developer LSR Group (LSR), as well as oil and gas companies Lukoil and Gazprom, to below 6%. Russia’s national airline Aeroflot also left the list of high paying stocks as its performance fell off last year following several years of sterling expansion.

The shares of real estate developer Etalon and Tinkoff Bank are the two newcomers to the top dividend tips. The real estate sector is recovering, especially the residential sector, driven higher by recovering income levels and the boom in mortgage lending. And Tinkoff’s “lifestyle bank” is making it Russia’s “other financial stock” after the state-owned retail banking behemoth Sberbank.

Sberbank is loved for its sheer size and profitability, but it too has been increasing its dividends and has now been included (just) in BCS GM’s preferred dividend stocks.

“Sberbank commons are our top pick and we like preferreds too, although we have no formal recommendation,” Smolyaninov says.

Dividend expectations for most liquid Russian names
Name	recommend	Price, RUB/s	12MF DPS, RUB	12MF DY	3M ADTV $mn
Norilsk Nickel (DR)	HOLD	1,140	127	11.1%	57.7
Tatneft pref.	-	392	38.7	9.9%	1.2
Enel Russia	HOLD	1.55	0.14	9.2%	0.5
MTS	BUY	290	26	9.0%	8
Rostelecom pref.	HOLD	58.2	5.2	8.9%	0.4
NLMK	SELL	151	13.5	8.9%	7.6
Severstal	SELL	945	84	8.9%	12.9
AFK Sistema*	U/R	12.7	1.11	8.8%*	6.6
Unipro	SELL	2.55	0.22	8.6%	0.8
Federal Grid Co.	SELL	0.16	0.014	8.6%	4.1
MMK	SELL	44.67	3.54	7.9%	14.7
Rostelecom	SELL	66	5.2	7.9%	5.3
RusHydro	HOLD	0.76	0.06	7.9%	7
Megafon	HOLD	526	40.3	7.7%	4.8
Detsky Mir	BUY	98.4	7.47	7.6%	0.5
Tatneft	HOLD	529	38.7	7.3%	12.3
Etalon Group	BUY	182	12.6	6.9%	3.8
ALROSA	SELL	76.7	5.24	6.8%	16.6
Moscow Exchange	HOLD	113	7.7	6.8%	18
Aeroflot	U/R	141	9.2	6.5%	18
TCS Group	BUY	1,077	70.2	6.5%	4.7
M Video	-	405	25	6.2%	2.7
Globaltrans	HOLD	567	34.8	6.1%	1.8
Surgutneftegas pref.	SELL	29.6	1.8	6.1%	8.4
Sberbank pref.	-	201	12.1	6.0%	12.6
LSR Group	BUY	858	50	5.8%	0.6
Gazprom	HOLD	145.3	8.11	5.6%	60.2
Gazprom Neft	BUY	259	14.1	5.4%	0.9
LUKOIL	BUY	3,862	201	5.2%	34.7
Acron	SELL	4,174	212	5.1%	0.2
Sberbank	BUY	240	12.1	5.0%	159
Rusagro	BUY	588	28.3	4.8%	0.6
Inter RAO	BUY	3.46	0.16	4.7%	3.6
VTB	HOLD	0.051	0.0022	4.2%	15.5
UC RUSAL	BUY	40.8	1.66	4.1%	10.6
Rosneft	BUY	318	12.5	3.9%	20.7
NCSP	-	8.3	0.28	3.4%	0.2
RusGrids	SELL	0.82	0.026	3.2%	3.2
Bank St.Petersburg	BUY	59.1	1.84	3.1%	0.2
Magnit	BUY	6,400	199	3.1%	38.8
TMK	BUY	77.2	2.23	2.9%	0.6
NOVATEK	BUY	687	19.2	2.8%	7.6
O'Key	BUY	148	3.4	2.3%	0.3
Surgutneftegas	SELL	29.2	0.65	2.2%	5.2
Transneft pref.	SELL	182,500	3,824	2.1%	5.8
X5 Retail Group	BUY	2,282	28.3	1.2%	21.1
PhosAgro	SELL	2,539	29.2	1.1%	1.2
* High uncertainty Source: Bloomberg, BCS GM
Source: Bloomberg, BCS GM