Amid EM Carnage, Russia Looks to Assert Dividend Dominance
February 5th, 2014 at 9:00am by Tom Lydon
It is cold in Russia. So are investors’ feelings about the “R” in the now notorious BRIC acronym.
Russia is a chronically discounted emerging market. These days, Russian equities are so inexpensive that not only do stocks there trade at discounts to the broader emerging markets universe, but at discounts to their own long-term averages.
Investors have not been taking the bait on compelling emerging markets valuations, a song that has been sung many times over the past year. The proof is in the pudding. Cheap Russian stocks have not prevented the Market Vectors Russia ETF (NYSEArca: RSX) and the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) as two of the five worst non-leveraged ETFs year-to-date. [No Central Bank Help for Russia ETFs]
Although it is not an invitation to snatch up Russia ETFs right now, interested income investors that can stomach the volatility should note Russian companies are at starting to provide more compensation in the form of dividends. That is more than can be said of some other emerging markets. [South Korea is no Dividend Destination]
Oil giant OAO Rosneft, “which pays out 25 percent of net income in dividends, will recommend raising payouts to 12.86 rubles a share from 8.05 rubles a year earlier, producing a 5.1 percent yield on today’s share prices, according to a presentation,” report Stephen Bierman and Elena Maznev for Bloomberg.
J.P. Morgan likes Russian oil names on the basis a weak ruble can help those stocks, saying of Rosneft “Rosneft’s negative EPS FX exposure turned out to be much less than we initially expected after TNK-BP’s takeover in 1Q13, and 2) the company’s valuation sensitivity to RUB/oil is the highest in the sector on the back of the highest financial leverage,” according to Barron’s.
OAO Mobile Telesystems, Russia’s largest mobile phone company, also recently unveiled a large dividend hike. Rosneft and MTS combine for 9.52% of RSX’s weight. Lukoil, RSX’s third-largest holding, is looking to pay at least 15% of profits in the form of dividends.
Investors looking for a more diverse ETF that still offers leverage to Russian dividend growth can consider the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM). DEM features a 19.6% weight to Russia, far larger than rival funds. Last year, Russia was the fastest-growing dividend payer in the WisdomTree Emerging Markets Equity Income Index, DEM’s underlying index.
Market Vectors Russia ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DEM.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.