Dividends at state-owned companies

May, 2017

Dividends at state-owned businesses

Specifics of the dividend policy at public state-owned companies
The review of dividend policies at major state-owned companies carried out by the API for Russia's Federal Agency for State Property Management (Rosimushchestvo) indicates that there is much room for improvement in implementing a transparent, long-term dividend policy of the Government as the principal shareholder of these companies.
Approaching dividend payments based on a free cash flow analysis and peer benchmarking could increase the amount of 2016 dividends to RUB 1.2-1.5 trillion.

The year 2016 witnessed a breakthrough in determining dividend payments as the Government of Russia issued an order to pay 50% of the RAS / IFRS net profit (whichever is the greater) in dividends. The dividend payout ratio was less than 50% at only 3 of the 12 companies (Gazprom, Rosneft and Transneft). Besides, the order was issued too late (in April), and many companies were not ready to pay that much in 2015 dividends. Their budgets approved as early as in December did not assume an increase in dividends, and some of them had to borrow in order to bridge cash gaps. The order only concerned dividends for 2015.

The same problem has occurred in 2017. Despite the obvious need for a long-term dividend policy, which would enable the Government acting as a shareholder to set appropriate requirements for companies in advance, the controlling shareholder failed to form a position in good time. In fact, the old order issued in 2006 is still effective (the amendments to it are still pending approval). As a result, decisions are made on a case-by-case basis, without appropriate disclosure of the rationale for profit distribution proposals. The lack of transparency and understanding by the investment community of the profit distribution principles impairs the investment appeal of Russian companies.

The API is committed to the development of a transparent and long-term dividend policy at Russian companies as one of its priorities. Together with investors, we have been implementing the following key initiatives for 2 years, with obvious support from the Government’s representatives in this matter (it is the Government that mainly benefits as a shareholder from implementing the best dividend policy practices):

1. Presenting investors’ opinions to the Government of Russia (benchmarking and analysis of companies’ opportunities, taking into account the debt and cash flow factors);
2. Analyzing the quality of existing dividend policies at public state-owned companies;
3. Studying the effectiveness of the Boards of Directors’ involvement in decision-making on dividend payments at state-owned companies (in fact, Board members are not currently involved in making profit distribution proposals and preparing the Government’s instructions);
4. Contributing to transparency improvements and long-term policy-making.

Each of these activity areas assumes efforts at different levels:

- legislation improvements (the problem of determining the dividend base as payments are currently only possible out of the Russian GAAP (RAS) profits and retained earnings of previous years);

- engagement with members of Boards of Directors (increasing the activity and effectiveness of Boards of Directors in preparing recommendations to the Government of Russia);

- increasing transparency and quality of disclosure of materials for general shareholders meetings (including the profit distribution issue);

- interaction with government authorities involved in agreeing upon the position of the Government as a shareholder.

We maintain active cooperation with all institutional investors: the opportunity to represent the most widely shared opinion of investors backed, among others, by depositors in pension and insurance funds and other institutional investors certainly interested in increasing the market value and appeal of Russian companies drives our effectiveness.

For details on the current projects of the Association and opportunities for your involvement in this activity, please contact the API Executive Office.

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