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4 Russian Stocks to Buy With Low Valuations and High Dividends

Will Healy

Despite Russia’s status as a so-called “BRIC” country, Russian stocks to buy receive little attention or interest. Even in the business media, most Russia-related coverage focuses on election-related collusion or President Trump’s relationship with President Putin. Despite the news coverage, investors should become aware of two facts. First, sanctions on Russia from the Obama era remain in place. In fact, many politicians in both parties want to toughen them further.

Secondly, Russia’s market has become extremely cheap. Of the major countries in the world, Russia has become one of the cheapest on measures such as price-to-earnings (P/E) ratio and price-to-book (P/B) ratio. It also boasts one of the highest average dividend yields. The current average P/E ratio comes in at just above 7.5. It had fallen as low as 3.5 times earnings following the recent slump in oil prices. This compares to almost 22 in the United States.

Russia’s conditions justify a lower P/E in many respects. Yes, Russia has become a kleptocracy. Seeing profits siphoned off to profit the ruling class remains a legitimate concern. Americans will also find few Russian stocks on the main U.S. exchanges. Most of the larger Russian companies still trade on the OTC markets. Moreover, if the U.S. imposes tighter sanctions, profits could go down.

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However, everything has its price, and many have shown a willingness to invest despite the dangers. Investor Jim Rogers, a one-time partner of George Soros, has taken positions in Russia. Other U.S. investors have found Russian stocks to buy as well. Investors who can stomach the looming geopolitical risks could profit handsomely . Investors should pay special attention to these four companies:


Russian Stocks to Buy: Sberbank (SBRCY)

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Sberbank (OTCMKTS:SBRCY) is one of Russia’s largest company by market cap. At a valuation of almost $65 billion, even the oil giants in Russia have not matched it in size. The Moscow-based banking giant provides retail, commercial, and investment banking services within Russia. Sberbank claims itself as the primary source of income for 0.66% of Russian families through over 14,000 bank branches within Russia. The company also reported that it held 45.8% of Russia’s retail bank deposits. Sberbank has expanded into other countries, especially in Eastern and Central Europe. It also maintains operations as far away as the United States.

The company began as a savings bank but grew by acquisition. Its growth continues as it has seen an average revenue growth of 18.9% per year over the last five years. Net income rose at a 16.5% annual rate in the same period.

Despite the massive growth, investors should add Sberbank to their list of possible Russian stocks to buy. SBRCY stock trades at just over 5.6 times earnings. Dividends have also become generous. A recent increase took its dividend to just over 76 cents per share. This brings its dividend yield to about 6.3%. For those that can stomach the risk, SBRCY stock offers a higher dividend yield and a lower P/E than any comparable bank in the U.S. or Western Europe.


Russian Stocks to Buy: Rosneft Oil Co (OJSCY)

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Rosneft (OTCMKTS:OJSCY) also holds one of the largest market caps among Russian companies. The company has become the dominant player in Russia’s oil industry for both upstream and downstream activities. Rosneft was created in 1993 by the Russian state. Although it incorporated in 1995, the Russian government retains primary control. It exports most of the crude not used in Russia to Europe and Asia.

Rosneft’s recent growth helps to make it one of the Russian stocks to buy. OJSCY stock has more than doubled from 2016 lows. Since April alone, it has risen by 47%. In the previous quarter, it more than tripled its profits. It has recently broken records for cash flows on rising oil prices and a weakening ruble. As a result, the company has now begun to pay down the debts it amassed while acquiring rivals and buying assets overseas.

OJSCY stock trades at a forward P/E of about 4.6, closely matching current Russian averages. The dividend — about 27 cents per share — represents a yield of just under 4.2%. Last year, the company switched to paying dividends twice a year. It agreed to share more of its cash at the urging of President Putin, which led to a significant dividend hike.

Because this remains a Russian company, geopolitical dangers still present a threat. However, with the falling P/E, the rising dividend, and the increasing stock price, investors should decide whether risks outweigh the potential for gains in OJSCY stock.


Russian Stocks to Buy: Gazprom (OGZPY)

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Whereas Rosneft dominates the oil sector, Gazprom (OTCMKTS:OGZPY) stands as the dominant natural gas company in Russia. While many may have seen Gazprom’s advertising during the World Cup hosted by Russia, few investors know it well. In fact, it wields tremendous market and geopolitical power, making it one of the more compelling Russian stocks to buy. Due to its vast reserves and proximity to its Western neighbors, it serves as the dominant natural gas company within Europe. The Russian government also holds majority ownership, so it remains powerful politically.

However, like several Russian companies today, it offers a compelling valuation. OGZPY stock currently trades at just over four times earnings. The stock also trades at a PB ratio of 0.26. This places its market cap at about $49 billion, even though its stockholders’ equity amounts of almost $190 billion! This gives Gazprom a larger equity position than either Sberbank or Rosneft. Due to currency fluctuations, dividends vary. However, the current dividend comes in at just over 25 cents per share. This amounts to a dividend yield of about 5.7%.

The stock has also suffered from a long-term slump. At just under $4.50 per share, it trades more than 85% below the record high of $30 per share it reached in 2008. I do not forecast a surge to the record high anytime soon. Indeed, investors face perils in this market that they would not encounter with a U.S. stock. It also faces competition from Rosneft, who wants a more prominent role in the natural gas industry. However, OGZPY stock offers the chance for investors to buy the dominant company in one of Russia’s most important sectors for just over 25% of its book value. That factor in itself should draw interest.


Russian Stocks to Buy: Mobile TeleSystems (MBT)

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Among Russian stocks to buy, Mobile TeleSystems (NYSE:MBT) serves as the AT&T (NYSE:T) or the Verizon (NYSE:VZ) of Russia. It offers fixed-line broadband, wireless and pay TV service within the country. It now stands as the country’s largest wireless carrier. The company also sells wireless service in some of the former Soviet republics including Ukraine and Armenia.

The stock struggled over the last ten years. It trades about 80% below its 2008 high and about 65% below highs reached in 2013. However, this has brought the stock to a current P/E of about 8.6. Though this appears high by current Russian standards, MBT stock could find itself positioned to finally climb higher.

The average P/E for MBT stock over the last five years has come in at around 11.2. Moreover, after years of falling profits, earnings growth is expected to turn around. Analysts predict average annual earnings growth of 10.4% over the next five years. This year, the company paid a dividend of just over 74 cents per share. This brings the dividend yield to just over 9%.

Even if the P/E falls to the current Russian averages, investors can earn a substantial return waiting for this stock to rise. Also, compared with U.S. counterparts, MBT stock pays a higher dividend at a lower multiple. Given the potential return and MBT’s position in Russia’s telecom industry, investors could do well despite the “above average” P/E ratio.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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