J#38: Why I Settled for a Russian Company Paying a “Mere” 4.8% Dividend Yield. Also in this journal: Life Lessons Revisited by My Mother’s Passing

The latest company Double Digits Dividend Fund has invested in is based in Russia. 

It has built a high-capacity infrastructure to produce and transport its energy related product all over Russia, as well as Western Europe and China, and only pays a trailing yield of a mere 4.8%!!

Doing my analysis on this company took me back to my trip to Moscow and St Petersburg in early 2016.  So before delving into the specifics of our Russian investment, I would like to share with you my first-hand experience of this vast, culturally and resource-rich country. My trip was short, just 2 weeks long but an eye opener. 

Russia was (and still is) under economic sanctions by the West for its annexation of Crimea peninsular (Ukraine).  The Muscovites whom I met were friendly, very supportive of their country (and President Putin), and did not seem to be too bothered that Western goods were no longer sold to them.  They were generally proud that they were able to cope by switching to domestic substitutes.

My physical safety was not an issue in Moscow.  I stayed at the National Hotel, a very posh hotel directly across from the Kremlin/Red Square.  I used the subways (some stations are tourist attractions on their own right because of the sheer beauty of their architecture and art). I also visited a local suburban farmers’ market to get a glimpse of life living as a local.

There is also plenty to see and experience in St Petersburg.  A beautiful city steeped in history. The overnight train journey from Moscow to St Petersburg is a great way to get there. 

Culturally, too, Russia has plenty to offer.  I got tickets to the Bolshoi Ballet and the Moscow Symphony orchestra.  Whilst watching the Moscow Symphony, the President of Russia, Vladimir Putin made a visit.  He sat 6 rows in front of me.  Besides how short he was, what struck me was how low key and low fuss his entrance to the concert hall was.  The audience was not required to stand up as he entered the hall.  President Putin that evening was just another Muscovite.

Moscow was just like any other large international city.  There was nothing to be feared visiting Moscow or because it has the tag of an ‘emerging market’ by the Western press.  In fact, after my visit to Moscow I was confident to buy — through my SaxoBank account — short dated (less than 1 year duration) Russian government bonds at a discount to par (98.95), with a 7.4% coupon. Upon holding the bond to maturity I got an annualized yield to maturity close to 9% per annum.

Russian government bonds purchase
Source: SaxoBank Trade Confirmation

Fast forward to today, I still maintain the same positive outlook on Russian investments.

That brings us to our Fund’s latest find.

You might recognize that a 4.8% dividend yield does not appear to meet our criteria as we look for companies with a 3-year trailing yield history in double digits.  Our investment selection approach has, and successfully so, been based on historic trailing yields. We deviated from this process with this investment but I am comfortable buying the company.  The company’s business is very strong, and it has committed to paying out a much bigger share of its earnings as dividends in future years.  This is the key. And I expect the yield to be well into double digits by next year.  Right now, may be the final chance to buy the shares cheaply.

There are three important reasons why we are buyers:

REASON 1: I am expecting this company to have a yield of 10.2% by June next year.

Both HSBC and Goldman Sachs also forecast the company to DOUBLE its dividend payments next year and maintain (hopefully even grow) it in the coming years.  Goldman and HSBC’s forecasts are based on the company improving its revenue streams.  For instance, Goldman is expecting the company’s earnings to DOUBLE this financial year as well (December 2021 year end). 

REASON 2: We Can Expect to See the Stock Price Increasing Between 50% to 100%

With a high indicated dividend yield (10.2%) for such a large capitalization company, I would expect the share price to increase next year for its dividend yield to reset back towards the current 4.8% yield.  Once the stock market recognizes the company is underpriced, we can see potential capital gains of up to 100% for its yield to reset to 4.8% (Goldman Sachs’ expectation is for a 50% capital gain based on their forward estimates).  Any capital gains we receive from increases in the share price are gravy on top of the double-digit dividends we expect to pocket. 

My final and third reason why we bought this company:

REASON 3: Their Dividend Policy is a business goal that places shareholders ‘front and center’ to reward them with dividends.

Reproduced below is the company’s revised dividend policy.  It was approved by the Company’s Board of Directors in December 2019.  Dividend payments to shareholders are ‘front and center’ in their business objectives and policy. 

“According to the new version of the Dividend Policy, net profit will be adjusted with regard to a number of non-monetary items (income and expenditure items unrelated to cash flows in the reporting period). The document includes a full list of adjustments. The dividend calculation principles and procedure are outlined very clearly, providing investors and analysts with a framework for more precise and better-quality forecasting in relation to the Company's payouts.

"The target level of dividend payouts is at least 50 per cent of the adjusted net profit under IFRS (International Financial Reporting Standards). It is planned to reach that level gradually: no less than 30 per cent based on the results for 2019; no less than 40 per cent for 2020; and no less than 50 per cent for 2021 and subsequent years.

"If the net debt (adjusted)/EBITDA indicator for the full year exceeds 2.5, the Board of Directors may resolve to reduce the amount of dividends recommended for approval by the General Shareholders Meeting. If necessary, this will allow the Company to keep its debt burden at a comfortable level.”

Other salient points about the company:

  • It has a market capitalization in excess of USD50 billion and, naturally, there is thus plenty of liquidity (i.e. trading volume).
  • Debt to Free Cash from Operations is 2.5 times based on the last financial year (Dec 2020). With earnings expected by Goldman Sachs to double, this ratio will comfortably be reduced.
  • A 5-year price chart of the US Dollar to the Russian Ruble is reproduced below. The Russian Ruble’s performance is predominately dictated by geo-political issues (e.g. the annexation of Ukraine and the alleged assassination attempts of political adversaries) and the price of oil.  It is too difficult to predict which way the Ruble will go relative to the USD. 

But we are investing in Russia as we believe the potential rewards (see below) of our investments far outweigh any currency risks.  Indeed, with oil prices recovering and other major metals and minerals prices in a strong bull market, an exporter of these commodities such as Russia could conceivably see a strong tail wind for its currency.

In contrast, the largest and once off, devaluation of the Ruble in the last 5 years was 15% (which took place between 12 January and 21 March 2020). As was the case with many currencies, this devaluation was as a result of global fears that the corona virus would bring economies to a stand-still.  If you recall, the price of oil, which is one of Russia’s largest exports, plummeted during this period to a negative number!

Russia is also not a ‘failed state’.  There is no intervention by the IMF nor are there capital flow restrictions that prevents us moving our monies into and out of Russia.  The Double Digit Dividend Fund offers investors the opportunity to diversify away from the USD.  We may in fact see a tailwind from the Ruble appreciating in the coming years compared to the red-hot US dollar printing press.

USD to RUB exchange rate
Source: xe.com

Below is our step-by-step strategy on how we plan to ‘execute’ our investment. 

  1. Invest in the company. We have acted! We deployed fifteen percent (15%) of our current assets under management to buy this investment.
  2. Wait for the next dividend announcement. The company pays an annual dividend and historically, the announcement date is in June each year, so we do not have too long to wait.
  3. We should, at a minimum, expect to receive a 4.8% yield based on the current yield. This is my downside risk expectation.  More likely, the dividend for 2020 will be hiked.
  4. Expect a yield heading towards 10.2% by June next year. My expectations are supported by Goldman Sachs and HSBC’s earnings and dividend estimates, among others. 

If next month’s dividend declaration is headed in the right direction, we will simply hold the investment.  If next month’s dividend announcement is disappointing, we will sell our holdings, and hopefully, ceteris paribus, pocket a yield of 4.8%. 

A Message for My Children

As you are aware my mother, your grandmother, passed away on the 7th of May.  We had her funeral 2 days ago in Perth, Australia.  The funeral was done via a live video stream as we are based in Singapore and cannot travel during the current Covid pandemic without serious restrictions and complications.

Death is a poignant event and provides a ‘reality check’ for us. It reminds us that we are mere mortals and have a very short time in this world.  I write in these journals about the financial wins we have had.  We focus on yields and making money.  That is a superficial reading and a message I hope you do not take from my journals. 

I have become numb to the messages that death and its associated reality checks bring.  I have been to enough funerals of friends and family. This numbness is not healthy, as the ‘cliches’ you often hear at the time of someone passing are not cliches but important messages:

“A burial shroud has no pockets”;

“You have two lives; the second one begins when you realize that you only have one”;

“Buy experiences and not assets”

These are all not just cliches but important messages that I hope that you will understand (and apply) over time.  Speaking of which, a trip to St Petersburg and Moscow with both of you is on my wish list.  I hope we can do this together during one of your school vacations.  After all, it is the experiences and memories that count and not the shroud I would eventually wear.

You learn a lot from talking to loved ones in the months leading up to their death, especially if they are incapacitated through illness and they know their time is nearing an end.  They have a lot of time to reflect on their lives and what is, and is not, important in life’s journey.  I will never forget that last hug your Granddad gave me and what he told me on his death bed – “You judge others by whether they place their interests ahead of others” and “you judge yourself on your life’s accomplishments and whether they were not at the expense of others”.

My father, your grandfather, passed away when you were too young to have known him.  It is for that, and other reasons, why I have written about him in a journal.

My relationship with your grandmother is best described as “complex” and one where there were no more tears for me to shed.  That said, I am happy you got to spend time with her. 

Peter with his mum in loving memory

To my two “Ks”, I hope that you will acquire and apply the skill sets to become financially independent, but more importantly, your hard-earned money can be used wisely in the relationships you have with others.  That is true wealth! 

I would like to dedicate this journal to my mother, your grandmother.  May she rest in peace and may the Lord, from whom she had obtained so much comfort and care, continue to provide for her.