Training on AMC and NSPF, September 6–7

Growth of dividends paid by Russian major companies is curbed by negative cash flow

Analysis of dividend payouts by Russian non-financial companies

  • Total 2017 dividends paid by non-financial companies increased by 16% year-on-year and amounted to RUB 1.69 trillion. Such growth stems from a higher payout by the major dividend generator – oil & gas companies – which increased 2017 payouts by 24% (RUB 711 bln) year-on-year. The share of net profit paid out as dividend climbed from 31% to 38%.
  • Dividends paid by state-owned companies approach a target of 50% of net profit. State-owned companies allocated about 35% of net profit to dividend payouts for 2017. According to ACRA estimates, the aggregate dividend amounted to RUB 697 bln (of which RUB 270 bln is the state's share); an increase of 19% against 2016. At the same time, the government plans to bring the dividend income within the budget up to RUB 550–600 bln in the coming years, although the current receipts are half as much.
  • Metals and mining companies have kept their dividends at the last year's level (RUB 455 bln), however, they have almost exhausted their free cash flow of the last year. Weaker ruble and favorable metal market conditions may boost sector's dividends.
  • Transportation companies have outrun telecom providers by dividend, but the power sector's potential is higher. Dividends of telecommunications companies have expectedly fallen in 2017 (-18%, RUB 120 bln). As a result, the transportation sector has become the third largest sector in terms of dividends (RUB 139 bln). The electric power industry is slightly behind with RUB 95 bln, but, in ACRA's opinion, the comfortable leverage, significant cash balances and the peak of capital expenses being over will allow the sector to become one of the largest dividend flow generators.
  • In 2017, the aggregate free cash flow of large businesses became negative, while less funds were spent to finance investment programs (the CAPEX to revenue ratio decreased from 15% to 14%). Without a significant increase in the operational efficiency of Russian non-financial companies, a surge in dividends may affect their credit quality.

Dividend growth has accelerated for the first time since 2014

For more details, please read ACRA’s research: Continued growth of dividends is driven by metals and mining industry dated July 20, 2017

The growth rate of dividend payments made by Russian non-financial companies accelerated for the first time since 2014. In 2017, the total dividend payments amounted to RUB 1.69 trln, which is 16% higher than in 2016. Last year, the payments to shareholders increased by 9%, while a year earlier — by 12% (yoy).

The reason is high growth rates of dividend payments in the largest (from this point of view) industry — oil and gas industry. In 2017, the sector companies paid out RUB 711 bln to their shareholders (+24% against 2016). In the metals and mining sector, dividends remained at the level of 2016 (RUB 455 bln), which is in line with our expectations.

The industry structure of dividend payments has not undergone significant changes in 2017: the oil and gas sector accounts for 42% of the total volume of payments, and the metals and mining sector's share is 27%. The shares of telecommunications, electric power and transportation companies were almost equal in 2017 (7%, 6% and 8%, respectively).

In 2017, Russian non-financial companies paid as dividends a larger share of net profit than in the previous few years: about 38% of net profit was distributed last year, whereas this figure was only 31% in 2015 and 2016.

To calculate the aggregate amount of dividends, we used data from 227 largest Russian companies that generated RUB 49 trillion in total revenues in 2017, a 35% share of the total revenue of all Russian companies.

Figure 1. Dividend growth has accelerated pushed by oil and gas companies

Source: ACRA estimates

State-owned companies allocate as much as 35% of their net profits to dividend

According to ACRA estimates, in 2017, the volume of dividend payments of state-owned companies grew by 19% and amounted to RUB 697 bln. The share of PJSC Gazprom (ACRA rating: AAA (RU)) and Rosneft Oil Company in the total dividend payments increased to 43% in 2017 (against 41% in 2016), which is due to an increase in dividends distributed by Rosneft Oil Company (+75%). The volume of dividend payments of PJSC Gazprom has remained almost unchanged in the last three years.

Dividends paid out by the companies in federal ownership contributed RUB 270 bln to the state budget for 2017, which is 10% more than a year ago (for the purposes of this paper, we still do not consider Rosneftegaz as a separate corporation). A similar indicator (but including dividends of a number of financial companies and banks) is included (as a result expected for 2018) in the current version of the main lines of the budget policy for 2019–2021. Note that in the previous version of the budget policy, the amount was almost twice as high (RUB 452 bln). This indicates that the 2017 dividend plan was not fulfilled in contrast to previous years. It is noteworthy that according to the current version of the budget policy, the Ministry of Finance forecasts more than twofold increase in dividend income since 2019 and the preservation of such level in 2019–2021.

Such significant growth could be driven by higher dividends paid by Gazprom and state-owned electric power companies. According to ACRA estimates, the probability that the state will be able to increase significantly the dividend income from Gazprom is low, while in the electric power industry, there is a potential for growth.

In 2017, the ratio of dividend to net profit shown by state-owned companies increased from 26% to 35% (or from 31% to 37% without Gazprom and Rosneft Oil Company, the largest dividend payers).

Figure 2. Dividend paid out by state-owned companies has been growing since 2014

Source: ACRA estimates

Metals and mining companies have paid out almost all their free cash flow as dividend

Metals and mining companies, the second largest segment of the economy in terms of dividend, have retained the level of dividend payments for 2017 similar to that in the previous year, distributing RUB 455 bln of their net profits. We forecasted such trend in 2017 and noted a limited number of sources for further dividend growth in the sector. The companies have passed the peak of capital expenses, and have been actively increasing dividends since 2014, the volume of which has stabilized at the level of 2016 in 2017.

Traditionally, PJSC MMC Norilsk Nickel (RUB 132 bln, or 7% less than in 2016) became the leader of the sector in terms of dividend payments. Annual dividend growth was demonstrated by PJSC Severstal (RUB 92 bln, +38%) and NLMK Group (RUB 84 bln, +52%).

FCF (free cash flow) is operating cash flow adjusted for dividend and capex.

In 2017, the sector companies distributed almost all their free cash flow as dividends. The FCF before dividend declined by 18% to RUB 501 bln in the past year, which was caused by the stronger ruble, because a significant portion of the sector's revenue comes from exports.

FFO (funds from operations) before interest and taxes is operating cash flow before changes in working capital, interest payments, and taxes.

The ruble strengthening also contributed to lower leverage: the ratio of total debt to FFO before net interest and taxes decreased from 2.4x to 2.1x in 2017. According to ACRA estimates for 2018, this ratio could return to the level of 2016, but this will not involve a significant additional outflow of funds for debt servicing and repaying and will not reduce dividend payments. Moreover, the weakening of ruble and favorable conditions in the metals markets can contribute to the growth of dividends in the sector.

For more details, please read ACRA’s research: Recovering prices for non-ferrous metals to boost import substitution in Russia dated September 13, 2017, Although a favorable period in the iron & steel industry is running its course, creditworthiness of Russian producers would improve dated November 16, 2017 and "Accumulative" effect: growing production of lithium and cobalt would impair their prices dated April 2, 2018.

Figure 3. Metal companies paid almost entire free cash flow for 2017 as dividend

Source: ACRA estimates

Potentially, electric power industry may outrun transportation and telecommunication companies by dividend payouts

In 2017, the dividends of communication providers shrunk by 18% to RUB 120 bln, which is caused largely by the fact that MegaFon (AA(RU)) declared no dividend for 2017. In the nearest years, the sector dividends will be under certain pressure. Starting from 2018, telecommunication companies will need to increase capital expenses for data storage infrastructure in order to comply with the amendments to the Federal law on counteracting terrorism and the Criminal Code of the Russian Federation.

Amid declining dividends in the telecommunications sector, the significant increase of dividend payments distributed by Transneft PJSC has resulted in that the total dividend paid by the transportation companies for 2017 amounted to RUB 139 bln. This allowed the sector to outrun communications operators and to take the third place.

For more details, please read ACRA’s research "10+10": Russian power sector anticipating new reforms to break investment pause dated April 19, 2018.

The electric power industry run behind the transportation and telecommunications companies in terms of dividend payments for 2017 (RUB 95 bln), but it is this sector that ACRA considers to have a significant potential for becoming one of the largest dividend flow generators in the nearest years. Power companies have passed the peak of capital expenses, and their leverage is comfortable, FCF is growing and the amount of cash in their accounts is substantial. In addition, the sector includes large state-owned companies that are still far from the dividend principle "50% of IFRS net profit." This may push up dividends paid out by the industry in the short term.

Figure 4. The electric power industry's potential to increase dividends is high

* Excluding JSCo “RZD”
Source: ACRA estimates

Unless supported by better operational performance, further increase in dividend payouts may impair the credit quality of companies

Since 2015, large businesses have recorded a negative trend in FCF margins, taking into account dividend payments. In 2017, this indicator fell to -3% against the backdrop of a decrease in capital expenditures, amid capex to revenue ratio decreased from 16% in 2015 to 14% in 2017. This suggests that the operational business of corporations has already exhausted the resources for further increase in dividend payments.

For more details, please read ACRA’s research Large businesses migrate towards bond market dated December 22, 2017.

Growing dividend payments for 2017 did not lead to an increase in the leverage of large corporations. Moreover, according to ACRA estimates, the ratio of total debt to FFO before interest and taxes decreased to 2.2x in 2017 compared to 2.5x in 2015, but this is explained by the revaluation of foreign currency debt. Negative FCF led to a reduction in the volume of cash on the accounts of large corporations: by 13% over the past year and by 22% since 2015. In addition, the companies had funds raised through the sale of investments or share issues.

In 2018, the leverage of the corporate sector will return to 2.4-2.5x against the background of the weakening ruble. At the same time, the weakening ruble will be positive for the profitability of exporters, which are the main generators of dividend payments. However, without a significant increase in the operational efficiency of Russian non-financial companies, a significant increase in dividends could adversely affect their credit quality.

Figure 5. Foreign currency revaluation allowed the companies to evade the increase in the leverage amid negative FCF

Source: ACRA estimates

Calculation methods

The dividend amount paid by non-financial companies for each year was determined as the sum of intermediate and announced annual dividends, although the actual payment was reflected in the financial statements only the following year. The aggregate dividend amount was calculated based on data collected from 227 largest Russian non-financial companies from various sectors, with the total revenue amount of RUB 49 trillion generated in 2017 representing 35% of the total revenues of all Russian companies. By ACRA’s estimates, the selected companies account for 95% of the aggregate dividends paid out by all Russian non-financial companies, as only large businesses can afford to pay high dividends.

To avoid any “double counting” of dividends distributed by parent companies and their subsidiaries, we incorporated dividends paid by parent companies in full in our calculations and adjusted dividends by subsidiaries to the amounts payable to minority shareholders. To correctly calculate aggregated financials when the results of one company from the selection were consolidated into the financial statements of another company, only consolidated numbers of parent companies were taken into account.

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