A potential opportunity for Gazprom could be selling the commodity to rapidly growing Asian economies like China. Natural gas consumption is expected to increase by 4% per year through 2030, versus 1% for Europe.
Gazprom also sells not only natural gas, but generates revenues from oil, electricity generation, refining and has a vast network of transportation assets to move the commodity into the end markets.
The company’s bylaws mention the requirement to distribute between 17.50% – 35% of its profit in the form of dividends to shareholders. The Russian Federation owns 50% of the entity, while 28.35% are held by ADR holders. The Russian state has an incentive to generate revenues from Gazprom, which is why it has the incentive to earn dividends from the entity.
Since Gazprom is so crucial for Russian political interests, it is highly doubtful that this stake would ever be privatized. Government mismanagement could be a red flag, although total mismanagement that would result in the company’s demise would not be very helpful to the Russian government.
Looking at dividend payments per share, and dividend payout ratios since 2003, it is evident that the company has managed to pay over 17.50% in the majority of the period. The notable exception is during the financial crisis, when dividends were cut steeply. Gazprom is more of a value play, rather than the typical dividend growth investment I purchase. The dividend fluctuates, and is increased or cut regularly.
In addition, as non-resident of Russia, there is a 15% withholding tax on distributions. A US taxpayer can obtain a credit of the amount of foreign tax withheld using form 1116. This is why it is important to avoid holding the shares in a tax-deferred account like a Roth IRA for example. The ADR’s I purchased represent two Gazprom shares traded on the Moscow Bourse. As a result, for all per share figures used above, simply multiply by two if you are an ADR holder.
Right now Gazprom is severely undervalued at 4.80 times earnings, and yields 5.30%. The company is priced for no growth, and as if earnings per share would be decreasing going forward. In general, it is very doubtful that this would happen, given the solid relationships the company has, solid infrastructure network to transport carbons, vast reserves. In addition the company is investing in projects to find new reserves and build infrastructure to supply new markets. Last, even if the stock price continues to languish, the high dividend amount is essentially serving as a tool to unlock the value of the conglomerate.
Full Disclosure: Long OGZPY