Kommersant, no. 203 as of November 6, 2019
According to Kommersant, ROSSETI wants to increase dividend payments to 75% of the 12-month profit according to the Russian accounting standards (RAS) starting 2020. While investors believe in paying dividends based on the free cash flow (FCF) or equal to 50% of the IFRS profit as a more reasonable approach, market analysts expect this path will boost the dividend payments increasing the rate of return on the holding’s securities to the market average.
ROSSETI, a holding company comprising Federal Grid Company and interregional distribution grid companies (IDGCs), majority owned by the Government of Russia (88.04%), may raise the bar for dividend payments to 75% of the net profit starting 2020, with RAS earnings taken as the payment base, according to Kommersant’s sources familiar with the proposal. Should the company close the year in the red (according to RAS), the shareholders will be entitled to interim dividends (based on the company’s performance for three, six or nine months. The company has already submitted the new draft dividend policy to the Ministry of Energy.
Based on the 2019 results, the company will still pay 50% of the RAS profit. “Just as all state-owned companies, ROSSETI is subject to the government’s requirement to pay at least 50% of the net profit earned according to RAS or IFRS, whichever is the greater, in dividends, although the holding company has been treated as an exception a good many times. It was as late as in 2016 that ROSSETI actually started paying dividends on ordinary shares. The current dividend base is formed by payments from subsidiaries less paper gains and losses (asset revaluation), capital increase expenses (ROSSETI regularly injects money in financially weaker entities) and gains from utility connection payments. This approach was battered by minority shareholders because of its non-transparency. The new policy is likely to abandon such adjustments.
For years, the holding company has been unable to pay 12-month dividends because of the paper loss according to RAS. In 2018, the company posted a loss of 11.55 billion rubles due to revaluation of the market price of its interests in subsidiaries; in 2017, the company’s loss amounted to 13.2 billion rubles against a net profit of 222.4 billion rubles in 2016. ROSSETI eventually paid a total of 2.5 billion rubles in interim dividends for the first quarter of 2018 and just over 5 billion rubles in dividends for the first quarter of 2019. That said, the Russian accounting standards only reflect the performance of the holding’s parent company, while the entire ROSSETI Group earned an IFRS profit of 124.7 billion rubles last year.
The Ministry of Energy will not comment on the new dividend policy-related proposals. According to ROSSETI’s comment for Kommersant, the percentage of net profit intended for distribution is under discussion. Anyway, the company is interested in having “dividend calculation principles that are transparent and clear to the investment community.” The company noted that it had developed proposals for minimizing dividend base adjustments, taking into account the group’s specific corporate structure, and aimed at ensuring sustainable growth of the dividend payments going forward.
Alexander Shevchuk, Executive Director of the Association of Institutional Investors, who is a Board member at some of the IDGCs), believes that the best practice is paying dividends linked to the group’s FCF, which is only possible “where economically adequate investment programs are developed.” Therefore, if the return on invested capital (ROIC) exceeds 14-15%, the free cash flow should better be used for investments rather than dividends, but if it is at least three times below the cost of capital – as is the case with ROSSETI, this approach is irrelevant, Mr. Shevchuk notes. “As long as the investment program is underperforming, the shareholders should be paid at least 50% of the IFRS net profit,” he adds.
The new dividend policy will actually make ROSSETI earmark 75% of the dividends received from subsidiaries for its own dividends, as stated by Vladimir Sklyar (VTB Capital). If the controlled companies pay dividends as before, the company may increase the payments under the new policy to 12-13 billion rubles for 2019 (assuming the dividend yield of 5-5.5%), 19-20 billion rubles for 2021 and later (8-8.5%). The key to the further yield growth of the holding is a higher dividend flow from FGC (this company currently contributes 16.4 billion rubles out of the total amount of 25 billion rubles in dividends from the subsidiaries). Vladimir Sklyar believes that the new policy will significantly reduce the holding discount, while the potential yield of 8-8.5% would put ROSSETI above the average on the Russian stock market. Sergey Suverov, senior analyst at BCS Premier, expects the dividend yield of ROSSETI to grow from today’s 2% to 6-8%, the average level in the energy sector, resulting in stronger investment appeal and, consequently, higher capitalization of the company.