As was noted in this space earlier in the week, Russia's dividend outlook is one part good news and one part potentially concerning news. The potentially concerning element is that some of Russia's state-controlled companies could be strained by Moscow's new mandate calling for significantly higher dividends.
Some of these companies are already highly leveraged and some analysts have raised concern about the balance sheet impact of higher dividends. The good news is that, well, Moscow is auguring for higher dividends. That theme can be accessed without having to take on country-specific risk with single-country Russia exchange-traded funds. Enter the WisdomTree Emerging Markets Eqty Incm Fd (NYSE: DEM).
Related Link: Mixed News On Russia's Dividend Outlook
Outside of dedicated Russia ETFs, it is hard to find an emerging markets ETF with the weight to Russia that DEM sports. DEM's allocation to Russian stocks is 14.1 percent, making the country the ETF's second-largest geographic exposure. DEM's Russia exposure is also more than triple that of the MSCI Emerging Markets Index.
“The Russian government, in a measure that was signed by Prime Minister Dmitry Medvedev on April 18, ordered eight state-owned companies to pay 50 percent of net profits as dividends. Net profit can be calculated following Russian Accounting Standards (RAS) or International Financial Reporting Standards (IFRS), and the companies must pay a dividend in accordance with the higher of the two values,” said WisdomTree in a note out Tuesday.
News of Moscow's higher payout plan was warmly received by global investors, something highlighted DEM's nearly 6 percent over the past month.
DEM holds over 300 stocks and not all of the eight Russian companies expected to increase dividends payouts. However, the ETF does allocate nearly 4.1 percent of its weight to Russian energy giant Gazprom, a company that is expected to contribute mightily to Russia's new dividend plan. Gazprom is DEM's second-largest holding. The Kremlin owns over half of Gazprom, a company with a payout ratio already north of 62 percent.
“Gazprom went up 10.6 percent over the three-day period following the announcement of the dividend mandate. It’s interesting that, based on the trailing 12-month dividend yield and earnings yield statistics, as of April 19, 2016, the payout ratio was implied to be 62.0 percent. We must note that this is not based on the IFRS or RAS calculations, nor does it account for the upcoming earnings announcement, as the earnings upon which those calculations could be based are not yet public. It is believed that Gazprom may double its dividend as a result of this mandate, but it is too soon to view this as a certainty,” added WisdomTree.
Disclosure: Todd Shriber owns shares of DEM.
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