Bet on black

When will metallurgists be able to return to payment dividends

In 2023, Russian metallurgists abandoned traditional dividend payments amid sanctions and market uncertainty. Additional pressure came from the excess profits tax, which they want to cover expenses to the social sphere. Is there a connection between the tax and the refusal of dividends and which companies will decide to pay out first.

Both ferrous (Severstal, MMK and NLMK) and non-ferrous metallurgists (Norilsk Nickel, UC Rusal, gold miners Polyus and Polymetal), as well as diamond miner Alrosa, refused dividends. Interim dividends last year were paid only by Rusal – for the first half of the year in the amount of $0.02 per share.

This is not the time to be generous

The reason for the decision to cancel payments to the company was called geopolitical risks, debt burden, possible sanctions and large-scale investment programs. “Now our efforts are aimed at stabilizing the financial position of the company, for which we are creating additional financial reserves, which is the reason for the temporary suspension of dividend payments,” Severstal told the Company.

Metallurgists, especially ferrous ones, can be called dividend aristocrats in the Russian market. All previous years they shared quite generously with their investors, as they were confident in the high export of their products. However, 2022 hit market issuers, their management and products with sanctions, so the market was forced to redirect 7 million tons of steel – a quarter of its exports from Russia. An additional problem for them turned out to be restrictions on the supply of equipment and components on the market.

Refusal of payments did not come as a surprise to analysts. In addition to the geopolitical situation, dividend payments were affected by an increase in the tax burden under the MET and excise tax on steel from 2022, as well as a decrease in product prices and a strong ruble in the second and third quarters of last year, he added Dmitry Puchkarev, stock market expert at BCS Mir Investments.

Another reason not to pay dividends could be the windfall tax, a law on which the State Duma adopted last week. It provides for a one-time payment by companies of 10% of the amount of excess profits for 2021-2022 over the indicators of 2018-2019. The tax will affect only companies with a profit of more than 1 billion rubles. Moreover, if the organization transfers the security tax from October 1 to November 30, then only 5% will have to be paid.

According to Green Light Management, the top 10 companies that will have to pay the largest amount of tax include 6 metallurgists (excluding security tax):

• Norilsk Nickel – 18.3 billion rubles;
• NLMK – 15 billion rubles;
• Rusal – 10.4 billion rubles;
• Severstal – 9.5 billion rubles;
• MMK – 9.2 billion rubles;
• Polyus — 6.3 billion rubles.

At the same time, the most sensitive to windfall tax among metallurgists will be:

• MMK – 9.9% of profit for 2022;
• NLMK – 9.6%;
• Rusal – 7.6%;
• Severstal – 7.1%.

“We consider it necessary to emphasize that the payment of dividends and tax payments are not directly related,” Severstal said.

A similar position is shared by experts. According to analyst FG “Finam” Alexey Kalachev, the excess profit tax may affect the amount of dividends, since it reduces the basis for their calculation, but does not affect the decision to pay or not to pay. Yes, and 10% of the annual free cash flow is the amount that has historically been paid in the form of dividends, he added Dmitry Skryabin, portfolio manager of Alfa-Capital Management Company.

Meanwhile, the payment of dividends in the context of the search for new opportunities to fill the state budget could become a red flag for the authorities and, in theory, provoke a further increase in the fiscal burden, Puchkarev warned.

Adapted and ready to report

Meanwhile, metallurgists have already fully adapted to the difficult situation. The Ministry of Industry and Trade in June estimated the export of ferrous metallurgy products at 1.75 trillion rubles at the end of this year, while in 2022 it amounted to 1.97 trillion rubles. Similar calculations are for non-ferrous metal: 1.43 billion rubles in 2023 against 1.407 billion rubles in 2022.

At the same time, metallurgists themselves began to publish production results for the first half of the year. The first to report was MMK, historically focused on the domestic market.

The company increased steel production by 7.5% in the second quarter, to 6.5 million tons, due to increased domestic demand. During the same quarter, steel production increased by 13% compared to the first quarter, to 3.5 million tons. Sales in the first half of the year rose by 11.1% to 5.8 million tons.

Metallurgists have not published financial results since the end of 2021. They were allowed not to do so until July 1, 2023 (publishing is expected to resume in August). If the permit is not extended (the Ministry of Finance does not exclude the opposite), then analysts are waiting for the disclosure of information and a further decision on dividends. “These are related things, because the decision on dividends actually declassifies financial indicators,” explains Kalachev from FG Finam.

But published financial statements are not a sufficient condition for the resumption of dividend payments. Alrosa formulated the necessary conditions for this: “the company’s ability to maintain business stability after paying dividends, ensure further development, and serve its social obligations to employees and regions of presence.” Severstal will return to the discussion of dividends only after it feels “stability for a certain period of time,” the company says.

“We expect that steel companies, after a one-and-a-half-year break, may return to paying dividends by the end of 2023,” says Stanislav Kleshchev, investment strategist at VTB My Investments. Puchkarev from BCS World of Investments does not exclude the return of metallurgists to dividends in the second half of 2023.

Analysts believe that Severstal, NLMK, MMK may be among the first to report this – the resumption of payments by at least one of these companies will pull up the rest. Then it makes sense to wait for the announcement of interim dividends from Norilsk Nickel as well.

Meanwhile, no dividends are expected from Rusal, in particular, in Finam. Kalachev clarified that the company will not be able to form a basis for payments due to rising costs, falling aluminum prices, low profitability, high leverage and the lack of dividends from Norilsk Nickel (Rusal owns 26.4% of the shares).

At the same time, the shares of ferrous metallurgists, according to Kleschev from VTB My Investments, now offer a high double-digit dividend yield on the horizon of the year, but subject to the return of companies to the previous dividend policy.