FOCUS: Russian telcos pay generous divs, MTS with new policy likely to lead

By Yekaterina Yezhova

MOSCOW, Apr 25 (PRIME) -- Sustainable money flows make stocks of Russian telecommunications companies – especially of MTS and MegaFon – attractive for investors. A new dividend policy approved by MTS’ board promised hefty payments to shareholders with a yield of up to 11%, and the operator’s peers could follow suit, analysts said.

“Shares of telecommunications operators are traditionally the ones with the most attractive dividend stories on the Russian stock market: they boast stable money flows and predictable formulas for distribution of payments to shareholders,” Promsvyazbank senior analyst Ilya Frolov told Russian Connection.

“I can also say that the telecommunications sector is one of the most generous with an average dividend yield of 5.7%, and MTS and MegaFon are among the top 10 by promising dividend portfolios. In total, only Middle East mobile operators can be compared to domestic ones by the level of a dividend yield of more than 8% on average.”

Viktor Markov at Zerich Capital Management said that dividends of foreign telecommunication firms are often lower. “A dividend yield of the U.S.’ AT&T is at about 5% and Verizon at about 4%,” the analyst said.

“Dividends of mobile operators are ones of the highest in the Russian economy with the exception of oil major Surgutneftegas, whose preferred shares bring a yield of about 15%.”

Among the county’s big three cellular operators – MTS, MegaFon and VimpelCom, solely owned by VimpelCom Ltd. – the first two are the most generous ones, according to the analysts.

“Today MTS has the most attractive dividend policy. Moreover, it has a long dividend history – it’s been paying dividends since 2006. MTS’s dividend yield was at about 9% in 2015, and MegaFon’s yield was at some 8%. VimpelCom Ltd.’s yield was much lower,” Markov said.

Frolov at Promsvyazbank said that MegaFon had recently led by the dividend yield of 9.2%, amid a dramatic fall in quotes, and shares of MTS followed.

“Some time ago telecommunications companies decided to anchor payments to free cash flows, and this format was introduced by MTS, MegaFon and Rostelecom. However, in view of a fall of the OIBDA margin with a constant amount of capital expenditures, MTS’s free cash flow shrank 21% in 2015. This factor could have played a key role in the proposal of a new dividend policy with fixed payments,” Frolov said.

MTS’s board of directors has recently approved a dividend policy for 2016–2018 with a target dividend yield set at 25–26 rubles per common share annually and 50–52 rubles per American Depositary Receipt (ADR), traded on the New York Stock Exchange.

The policy stipulates a minimum amount of annual payments at 20 rubles per common share and 40 rubles per ADR.

“Dividends will be paid, as earlier, in two parts during a calendar year. At that MTS is switching to a smoother distribution of payments within a year,” the company said in a statement. The board also decided to pay 28 billion rubles in dividends for 2015, or 14.01 rubles per common share and 28.02 rubles per ADR. Shareholders will consider all the board’s recommendations at a meeting on June 23.

“MTS’s new dividend policy stipulates a dividend yield up to 11%. The news has already boosted the price of operator’s stocks in April. Higher dividends are a good means of stimulating investor appetite,” Markov said.

“The other operators could follow MTS’s suit and offer higher payments as well, if their financial results allow them to do it. Everything will also depend on the health of the domestic economy.”

UralSib Capital said in a research note that MTS remains one of the best dividend bets among the telecommunications companies thanks to its strong operating results, which ensure a robust money flow, and interest from its controlling shareholder, multi-industry holding Sistema, for which MTS is the main source of money.

MTS’s common shares put on 23% since the beginning of the year closing at 257.40 rubles on April 21 on the Moscow Exchange. ADRs’ climbed 45% to $8.96.

(66.2198 rubles – U.S. $1)

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