A huge number of transactions are carried out on the Russian stock market every day. Most of them are first-tier securities. Professionals call them blue chips. In Russia, blue-chip stocks are represented by reliable shares of successful domestic companies with a steady growth prospect and high liquidity. Below is a list of the top 15 profitable local blue chips with a good dividend history.
What are the Russian blue-chip stocks
A blue chip is a well-established and financially stable company. Originally this term was used to define the most expensive chips in a casino. These days the words “blue chips” is adopted by a stock market to describe highly reputable companies that sell high-level and widely acknowledged products and services. Blue chips have the following characteristics:
- Reliability. First-tier securities are usually represented by nationally recognized corporations that have a sound record of solid earnings and a great year-to-year performance.
- Liquidity. Blue chip shares have a high trading volume (up to 80%) in a stock market. This means that such shares can be easily converted into cash.
- Longevity. Blue chips are well-established corporations with a long history. They have always had great financial and economic metrics and stable business growth.
- High demand. Blue chips are usually core holdings for everyone: private and institutional investors, advisers, and traders. They owe these qualities to their stable performance and high liquidity.
The MICEX index, for example, includes many Russian blue chip stocks. An index is a great tool that helps investors easily monitor the dynamics of profitability over time, check the returns, and perform other financial operations.
Indexes are usually reviewed once a quarter, which means that theoretically one of the blue chips might be replaced by another one that has better key figures.
If blue chips go up, other companies represented on a stock market also show positive dynamics. If they go dawn, indicators of others follow this pattern too.
Blue chips characteristics
The other distinguishing features of blue chips are as follows:
- High market capitalization. Blue chip securities are generally large-cap stocks. The overall value of their outstanding shares is usually numbered in tens of millions of dollars, which significantly outstrips the value of other stocks on a market.
- Perfect Marketability. Marketability or liquidity of shares shows how quickly they are bought or sold in a market. Blue chip shares are sold and bought very easily. Every second there is a great number of transactions of this kind on the market.
- Lower spread. Spread refers to the difference between the buy and sell prices quoted for a stock. The lower the spread is – the better it is for investors and the more popular the security is.
- High daily trade turnover. Blue chip operations amount to 80% of the total number of trades made on the world markets. Blue chip stocks are highly sought-after securities. Many investors buy them to earn on their dividends and the interest. Market speculators treat blue chips as a great source of earning on the difference in rates while instant buying and selling.
- Resistance to economic shocks. When the market is negative, the medium- and small-cap stocks start falling. The blue chip stocks go down too, but not as rapidly as their smaller counterparts.
- Reliability. Blue chips are the companies that take leading places in their economic sectors. Some corporations have become pure monopolists. This means that they have a very low chance of a sharp decline in their economic status.
- Stable dividends. These are usually the firms with excellent cash flows and low debt levels. This allows shareholders to get a reliable return from their positive cash flows through regular dividend payments.
- Blue chips enable margin trading. This is basically a process that allows an investor to buy more stock than he or she can afford. Although the action suggests better profits, it usually involves higher risks.
- Transparent financial reporting. Blue chip firms value their reputation and cannot simply afford inaccurate and misleading reporting. Transparency and openness allow investors to get information invaluable for their financial decisions.
- High free float value. The term describes a part of blue chip stocks that is not owned by any government institutions or top management. These are “independent” shares that are in free circulation on a market.
Blue chip shares are very often overvalued – because the future revenues and business growth are already included in their prices. Therefore, investors shouldn’t expect a fast rally from them.
Differences from other securities
Blue chips have several fundamental differences from medium and small-capitalization stocks:
- Low volatility. If we take a look at blue chip dynamics, their graphs are much smoother than the ones of their small and medium-sized counterparts. This becomes especially noticeable during periods of economic turmoil in the country such as sanctions imposing, the falling value of the ruble or geopolitical conflicts. The hallmark of the blue chips stocks is that during short-time periods of economic growth they cannot keep in step with low-liquid and highly volatile stocks of small companies, which grow faster and bring more returns to the investors. This kind of performance seems pretty exciting but only for short periods of time!
- Low risks of slumps. If the ordinary company faces economic problems, this usually triggers many investors to refuse or sell their shares, because they tend to cheapen due to the falling demand. This is quite a different matter in the case of the blue chips. Their name and reputation never trigger such sudden drops in demand, even during lingering issues. For that reason, blue chip stocks are not refused as quickly and massively as shares of their opposites.
- Lower revenue potential. Growth drivers have already been embedded in the blue chips’ prices. This is why blue chips stocks don’t tend to go sky-high even during local economic upswings. In contrast, the second and third-tier shares have higher revenue potential. But the risks are higher here too.
- Dividend policy. There is always a dividend policy that binds the company to distribute its dividends to shareholders. This is the policy that governs the dividend payouts. The majority of blue chips offer stable and attractive dividend policies (up to 60–80 % of their profits), which reflects their strong financial position. Regular companies may choose a liberal dividend policy with a very unsteady percentage of earnings. If a company profit goes up, an investor usually has a larger dividend, but if it next year gets down, a stockholder may not get a dividend at all. There are also strict, constant, and residual dividend policies.
- Name and high popularity. Investing in blue chip stocks is highly advisable – as thanks to all the above reasons blue chips have proved themselves as highly profitable and the least risky investments.
There are plenty of managed funds engaged in the forming of diversified long-term portfolios of Russian stocks, which often include Russian blue chips. This choice is not accidental, as blue chips help significantly reduce the overall long-term risk of such portfolios.
Top Blue chips on the Russian stock market
The list of Russian blue chips includes companies from important economic sectors such as mining, metallurgy, oil and gas, finance, trade, and many, many others. There are 15 such companies in total. Let’s have a closer look at each of them.
Alrosa is the largest diamond-mining company that was established in 1992. Alrosa mines 95% of precious stones in Russia, which comes to about 30% of the world’s total. The company is constantly developing: it welcomes new technological solutions, improves occupational safety and is persistently looking for new areas and mines. All these actions lead to a great reduction of the firm’s operational costs. As a result, Alrosa ranks first in the world in diamond mining.
Alrosa has an approved dividend policy. The amount of the dividend payout depends on the following factors:
- If the dividend payout ratio does not exceed zero, the stockholders receive 100% of the available distributable profits.
- If a Net Debt to EBITDA ratio is below 1, the dividend payout accounts for 70-100% of free cash flow.
- If the above ratio is 1-1.5, the company will pay 50-70% out of its available for distribution profits.
The dividends for the 2020 financial year were 9,54 rub per share with a profit of 7.6% per annum. In 2021 the payout increased and, according to the first half-year results, the Alrosa recent payment in October 2021 equaled 8.79 rub. per share with a profitability of 6.4%.
The growth of dividends is associated with a rally in the diamond market. At the beginning of 2021 prices for diamonds broke all records. This had a positive impact on the company’s financial results. But these days the prices have dropped, the market looks less overheated, and, as a result, investors can’t expect very high earnings.
* Please note that Alrosa pays dividends twice a year.
The company’s business is highly dependable on market conditions, in particular, on prices for precious stones as well as the Russian ruble’s exchange rate. A period of the past few years was characterized by exceptionally volatile financial indicators impacted by frequent jumps in diamond prices and exchange rates of national currency.
Alrosa has the following financial data:
- P/E = 18.1
- ROE = 18.4%
- Net debt/EBITDA = – 0.20
No list of Russian blue chips would be complete without Alrosa. The company is featured by sufficient capital and great prospects for future growth. Alrosa managed to finish the difficult for others year with great financial indicators.
The experts assume that it’s going to be a shortage of precious stones in the near future. This assumption also contributes to the prospective growth of the company.
The overall financial stability and a favorable dividend policy of Alrosa attract investors from all over the world. Although the risks of investing in Alrosa are minimal, they can’t be completely eliminated. If the demand for diamonds falls, or the company faces some difficulties, there will be no high dividends on the firm’s shares.
X5 Retail Group
X5 Retail Group is one of the largest Russian merchants engaged in the sales of groceries. As per 2021 data, the company owns 18.6 thousand stores all over Russia.
The revenue distribution between the groups of stores included in the Group is as follows:
- 79% – Pyaterochka
- 16% – Crossroads
- 5% – Carousel
At the moment the market share of X5 Retail Group among Russian retailers is about 11%, which puts it in the first position nationally. In the coming years, the company is planning some structure changes. Some stores are going to be closed while others will be transferred under the control of Crossroads.
Assets dynamics of the group show steady growth. At the same time, there is a growth of yearly profits as well as dividends.
The 2020 dividends were 184.12 per share with a dividend yield of 7.8%. As per the group dividend policy, 25% of the company’s net profit goes to dividend payments. The Board is expecting to increase this figure up to 50%.
The company is registered in the Netherlands and therefore is subject to double taxation. The company needs to pay 13% to the national revenue authorities, and another 15% – to foreign bodies. But the private investors get only the balance – since the distributed to them dividends had been already taxed.
X5 Retail Group does not intend to dwell on the achieved financial results. Its ambitions include further development of its retail network, which would allow them to conquer the domestic retail market.
The main features of the X5 Retail Group are as follows:
- Double taxes on dividends
- Plans of increasing the dividend payments up to 50%
- Good financial performance for 2020 thanks to favorable interim factors
- Dependence on the demand and purchasing power of people
- Increasing of both long- and short-term liabilities
- Minimizing investing risks due to the group’s adherence to the policy of embedding inflation into the cost of goods (COGS)
The current financial data of the group comes down to the following:
- P/E = 17.4
- P/S = 0.30
- Net debt/EBITDA = 0.89
- ROE = 37.1%
Today, the X5 Retail Group is a dynamically developing corporation with a tough experience and stable market position. It has great growth potential and is planning to expand further into the market. At the moment its share in the retail sector comes to 11%, which is not as high compared to some western analogies.
This is one of the largest world leaders in the oil and gas industry. The company owns about 72% of the gas resources in Russia. Gazprom is engaged in the extraction, processing, and transportation of gas and oil. The total length of Gazprom’s gas network is over 168 thousand kilometers. The branchy pipelines variegate the Russian land supplying the country as well as Europe with vital natural resources.
Oil and gas exploration is one of the main operating activities of the company. One of its largest overseas projects is located in Venezuela, on the Bay of Bengal coast.
Gazprom stocks are among the most liquid securities on the domestic stock market. It is also one of the most important players of the world’s leading stock exchanges such as London, Frankfurt, and Singapore. The proportion of the Gazprom securities in the MICEX and RTS indexes is the largest, compared to other Russian companies. The amount of transactions re Gazprom comes to 3 billion rubles daily.
The company main characteristics include:
- The major supplier of gas into Europe
- Dependence of prospects on geopolitical circumstances
- Direct dependency on the gas and oil market situation
Gazprom pays stable dividends. According to the company’s dividend policy, an investor is entitled to 17.5% to 35% out of the firm’s net profit. The 2020 dividend was 12.55 rub per share with a dividend yield of 3.6%. According to the preliminary estimates, the current rally in the gas market would help to increase the 2021 yield.
Major financial indicators of the current Gazprom performance are:
- relentless and stable annual oil and gas production
- increase in gas exports
- upsurge in assets and liabilities
- annual increase of operating expenses and capital expenditures
- capitalization of 8.1 billion rubles
- P/E – 60,4
According to experts, in the coming years the corporation will remain as one of the strongest and most reliable companies in the Russian market. So far, the oil and gas giant is fully fulfilling its obligations to its consumers.
As for the long-term prospects, the Gazprom’s current position may change due to the transition of many world economies to the usage of green energy.
Norilsk Nickel is a blue chip with a market capitalization of 3 trillion rubles. The company mines and produces non-ferrous and precious metals. Norilsk Nickel assets include 10 mines with enough resources for another 80 years of glittering future.
62% of the shares belong to Vladimir Potanin and Oleg Deripaska. The remaining shares are in the free float but their substantial part is owned by heavy investors.
The main tangible assets of Norilsk Nickel are located in the following areas:
- Taimyr Peninsula
- Trans-Baikal Territory
- The Kola Peninsula
The bulk of the resources are located on the Taimyr Peninsula, where the company mines most of its metals: copper, nickel, platinum, and many others. Apart from that, the company owns assets located in other parts of the world: Australia, South Africa, and Finland.
Chalk Up! In terms of nickel production, the company ranks first in the world
The greatest advantage of the organization refers to the idea of diversification, which applies as much to its operations as to its securities. Norilsk Nickel has an excellent growth outlook thanks to the following:
- significant build-out activity
- electrification and hybridization of transport
- RES construction
- addressing to the growing demand for stainless steel in China
- waning interest in the diesel transport sector
The company’s revenue rates are growing year by year, and are increasing by an average of 10-16%. In 2020, thanks to the high demand for copper and platinum, the revenue figure exploded to $ 15.5 billion, and free cash flow – to $ 6.6 billion. As a result, the company’s Net Debt to EBITDA ratio decreased to 0.6.
For the past few years, the company has been paying generous dividends. The present payout policy is based on Net Debt to EBITDA ratio of 1.8, which results in a 60% figure. However, there is an opinion that the current dividend policy has to be reviewed in order to create more attractive investment opportunities for stockholders. Thus, starting from 2023, the policy is expected to be changed. The dividend payout will accordingly be about 60% of its net cash flow.
Changes in the dividend policy will allow the group to
- Increase its investments into business development
- Expand further into the metal market
- Implement ambitious large-scale projects locally and abroad (such as its impressive Arctic–Palladium scheme)
Stable positions in the non-ferrous metals market allow Norilsk Nickel to remain the true and genuine blue chip of the Russian stock market. Given its huge mines’ reserves, the company is going to remain in this cohort for many years.
Lukoil is the largest private oil and gas company in the country. Founded in 1991, Lukoil refers to vertically integrated organizations based on the idea of controlling the entire production chain, starting from geological exploration and ending with mutually beneficial relationships with end-consumers.
The company has 3 long-established operating segments:
- Exploration and mining. Apart from Russia, the company has branches operating in Kazakhstan, Uzbekistan, Azerbaijan, Romania, Norway and Mexico. It is estimated that Lukoil owns resources that will be more than enough for about 20+ years. The bulk of them is situated in Russia.
- Processing and realization. This refers to oil refining, gas processing, petroleum chemistry as well as marketing and commerce activities.
- Corporation segment, which is engaged in the provision of analytical and financial services, business planning, and other important matters.
In 2020 Lukoil’s revenue amounted to 5.6 trillion rubles, which ranks it in this regard the third after two other giants such as Gazprom and Rosneft.
Though the overall performance of the company is good, it is subject to some fluctuations. The company’s results strongly depend on the market conditions regarding:
- Oil quotes
- OPEC actions
The main advantage of Lukoil over other competitors in the oil and gas area is the low level of debt. This means that when the firm is temporarily placed in an unfavorable situation, it is still capable of generating profits. In 2020, for example, Lukoil managed not only to maintain a good net profit but also to increase its net cash flow. A great part of it was played by the Lukoil’s feed processing activities.
The largest shareholders of the company are Vagit Alekperov and Leonid Fedun. But the bulk of the firm’s shares are in free circulation.
Lukoil has long been included into the indexes of the most important stock exchanges such as MSCI Russia MOEX and RTS.
The key aspects of the company are as follows:
- Exporter with a good business diversification. One of the greatest industry leaders that receives most of its income in foreign currency, which offers good protection against the Russian ruble devaluation.
- Stable dividends. Dividends are paid every 6 months. In the crisis 2020 year the company dividends were 259 rub. per share with an annual yield of 3.7%. In the previous 2019, the figures were accordingly 259 and 8.8%. Judging by the 2021 performance, the expected dividends are going to be higher.
- Dependency on oil and gas prices. An increase in prices contributes to an increase in the company’s profits; and their fall, on the contrary, aggravates its financial position.
Lukoil has been and going to be a strong and reliable blue-chip. It has substantial resources and perfect opportunities for business development.
This is a major Russian company with broad retail interests throughout the country. It is the second-largest group in the retail industry and one of the largest domestic providers of work with about 300 thousand employees.
By mid-2021, Magnit operated more than 22.3 thousand retail outlets. The company has an objective of providing affordable stores in every district whether it is urban or rural; close it is to the city center or far away.
Under the Magnit brand operate the following retail chains:
- Family – hypermarkets of large capacity
- At home – stores located within walking distance from houses
- Cosmetics – stores that sell non-food items such as beauty and personal hygiene products, tableware, packaging, and so on
- Apteka – in other words, pharmacies
- Extra – hypermarkets with a maximum possible assortment
The company has a forked logistics infrastructure with about 4 thousand distribution centers scattered throughout Russia. The Russian Far East is the only region that is not covered yet by Magnit.
Apart from the grocery goods supplied by other vendors, Magnit sells its own produce focused on the “middle class” quality products, starting from dairy foods and ending by homewares.
In recent years, Magnit has actively been developing the e-commerce strategy aiming to reach large masses of people anytime and anywhere, thus managing to comply with difficulties associated with the pandemic. It has a loyalty program with millions of customers registered as its members, which allows its analysts to accurately assess their preferences and respond to requests.
In addition to the opening of new outlets, the company development program includes:
- redesigning of old stores
- small competitors’ takeover
- digital transformation of business
All the company’s investments are aimed at revenue growth and have become number one in its niche. So far Pyaterochka is considered to be Magnit’s main competitor.
At the moment, the largest shareholders of Magnit are:
- VTB – 17.3%
- Marathon Group – 16.7%
The rest 63% of the shares are in the free-floating.
Magint’s shareholders enjoy its stable dividend policy. In 2020 the amount of the dividend payment came to 490.62 rub per share and a yield of 8.9% per annum.
Magnit is not only one of the largest national corporations but also an organization with longsighted views that has securely prepared itself against inflation volatility – by taking its complex pricing mechanisms into account as a part of its COGS and COGP calculations.
MTS is one of the leading telecommunications companies registered in Russia and providing its services to Russian, Armenian, and Belarusian consumers. From a regular telecom provider, it has long developed into a diversified multifunctional business with many departments functioning under one name.
The company is engaged in the following activities:
- Mobile communication and the internet
- Pay-per-view TV
- Financial services
- Phone and electrical merchandise trade
The company pays a lot of special attention to modern technologies
At the moment, MTS is the largest mobile operator in the country.
During the last decade, the company has significantly grown. Its financial results continue to meet the expectations of many loyal investors. Over the past 5 years, for example, the firm’s assets have almost doubled, and by now amounted to 919 billion rubles.
The main characteristics of MTS are as follows:
- A regular dividend policy. The company has a long history of paying stable dividends every year, which are often above the official inflation rates. In the last 2020 year, the MTS’ dividend was 35.44 rub. per share with a yield of 11.2%. It’s expected that in 2021 the payout will rise to 37.06 rub. per share that is comparable to the yield of 11.7%. Some experts compare MTS stocks with high-quality corporate bonds because they both are believed to have the ability to survive many market challenges.
- Digitization of the retail segment, which allows the company to confidently outpace its competitors in terms of the number of active subscribers.
- Schemes to implement 5G networks. MTS is the first company in Russia licensed for the implementation of 5G. This project got it even more subscribers. Although the 5G scheme may lead to the capital expenditure rise, it isn’t supposed to exceed the average historical level.
- Increased focus on environmentally friendly products, which also has a positive impact on the firm’s profits and revenue.
Although the MTS’ benefits greatly surpass its drawbacks, it would be unfair to pass them over. There is, for example, a currency risk that might affect foreign investors, in the case of exchange rate fluctuations. In case of the denomination of national currency, this may lead to the misconceived interpretation of the company’s financials and greater transaction risk.
Another risk is associated with one of the company’s main shareholders AFK Sistema. This is a large Russian investment conglomerate that has a great impact on the MTS’ governing and management. It is possible that Sistema may take control over the bulk of the MTS’ assets or sell a part of its shares at an inflated price.
Anyway, MTS remains an outright blue chip on the Russian stock market. At present, it is a well-recognized, strong, and promising corporation with a proven track record of success and stable dividends.
This is the second-biggest supplier of natural gas in Russia. One of Novatek’s greatest ambitions is to take the lead in the exploration and production of liquefied natural gas.
The main operational activities of Novatek are:
- geological exploration
- extraction and processing of natural gas
- sale of hydrocarbons
Most of the corporation’s revenue comes from the sale of gas. Novatek is also engaged in the extraction of oil and other refined products. The largest shareholders of the firm are Gazprom, Leonid Mikhelson and Gennady Timchenko.
The long-term development strategy of Novatek comes to the following:
- To increase the production of liquefied natural gas to 70 million tons by 2030 (compared to the 19 million tons result for 2020)
- To intensify the SNG exploration by the expansion of the power capacity at Yamal SNG, Arctic SNG-2, and Ob SNG
- Launch the project Arctic SNG-1 in 2027-2030
In September 2021, Novatek bought two more large deposits for future exploration, mining, and processing. Liquefied natural gas, or LNG, remains one of the top priorities of the company as well as of the Russian government. LNG is planned to be transported not only to other parts of Russia but also to other countries, via national and international pipelines. By the end of 2035, it’s expected to increase the loading to 180 million tons.
According to the new dividend policy adopted in 2020, the company allocates at least 50% of its adjusted IFRS net income to dividends (compared to the last year’s 30%).
Thus, in 2020 the dividend payout came to 35.56 rub per share where an annual yield was 2%. In 2021 these figures are anticipated to be 51.41 and 2.9% respectively.
The current firm’s price-to-earnings (P/E) ratio of 31.8 is considered to be a bit too high in contrast to its main counterparts.
The key characteristics of Novatek’s strategy are:
- Effective corporate governance
- The lower tax rates and higher profits thanks to the gas and oil industry benefits
- It ranks the 7th in the world among the public companies engaged in the gas production
- Only 10% of overall gas production falls on the domestic market
Investing in Novatek means that you’re investing in a comparatively reliable blue-chip stock. Due to the favorable market conditions associated with record gas prices, 2021 is going to be a highly profitable year for the company.
But there are also risks associated with a reduction in gas demand due to the pandemic, as well as with high competition among shale producers. Novatek’s development is unfavorable for its western competitors, especially for the US ones, who may use their favorite means of protection in the form of sanctioning.
The Russian gold miner Polyus has one of the largest yellow metal reserves in the world. The company mines, produces, and sells gold. The main advantage of Polyus over competitors is the low cost of production, mainly thanks to rich deposits and exceptional efficiency.
The company is actively developing new deposits. Over the past 7 years, Polyus has increased gold production by 63%, which was accompanied by a simultaneous decrease (38%) in the operating expenses.
The profits are planned to go to the following activities:
- Construction of the gold extraction factory in Blagodatnoye;
- Expansion of production at the Olympiada, Kuranakh, and Sukhoi Log fields
Chalk Up! According to a few sources in 2020 Polyus ranked first in the world in terms of its gold reserves (104 million ounces). It is followed by its American adversary Newmont with 94 million ounces.
The company ranked fourth in 2020 (2.8 million ounces) in gold production.
The major features of the Polyus are as follows:
- Dependency on the prices of gold denominated in US dollars. The latest years’ price increase had a positive result on the company profits. Diversification and hedging are the company’s main tools for reducing its dependence on market conditions.
- The company’s debt burden is gradually decreasing. Thus, the total 2019 debt amounted to 203.4 billion rub, but in 2020 it came only to 150 billion rub, which will help the firm to increase its capital costs for modernization of fields.
- The main shareholder of Polyus is Suleiman Kerimov, a Russian billionaire, who owns 76.34% of the company’s stock.
- Since gold mining is a strategic industry for the country, the Russian government is unlikely to increase the tax burden for it.
According to the current dividend policy adopted in 2018, Polyus pays out dividends based on 30% of EBITDA provided that the ratio of net debt to EBITDA is not higher than 2.5.
In 2020 the firm’s dividends were 627.33 rub. per share with an annual yield of 4%. The 2021 payouts are expected to come to 654.63 rub.
Many experts think that investments in Polyus stocks are comparable to investments in gold. If gold prices are rising, Polyus’ stocks value is rising too. This is exactly what we are seeing these days. There is every reason to believe that the Polyus financials as well as investing in its shares are going to be beneficial for many more years ahead.
Polymetal International is a British-Russian mining company engaged in the extraction of gold, silver, and copper. The company is included in the list of the Top 3 best gold mining firms in Russia. Today Polymetal group is a vertically integrated company with a growing global presence.
Polymetal’s activities include:
- geological exploration
- mining development
- precious metals’ extraction
- transportation and sale
The main source of the group is gold. The bulk of the company’s tangible assets is concentrated in Russia. Other mines and explorations are situated in Armenia and Kazakhstan.
In regards to the gold, the company’s major customers are:
- Bank of Russia
- Swiss and English banks
- Jewelry companies
The company’s greatest advantage is low ore extraction costs, mainly thanks to favorable bowels of the earth. Every year Polymetal proactively invests in the exploration and development of new silver and gold fields, primarily in the Russian Far East.
Chalk Up! Officially the company is registered in Jersey, a self-governing crown dependency British Island.
Polymetal International is listed on the Moscow Exchange and London Stock Exchange. On the MOEX the Polymetal stocks are traded as ones of a foreign issuer. 45% of the shares are in free circulation.
The growth factors of the Group are as follows:
- The global demand for gold is rising at a rapid rate. Given the crisis and high inflation, many investors consider gold as a protective tool and invest in it.
- The company is focused on the diversification of its activities and investments. It reports its financials in both Russian rubles and foreign currency, which is a good safety net against devaluation.
- Low operational and logistical costs. The company sells most of its gold domestically, which greatly reduces costs.
- Usage of advanced technologies and expansion of production capacities to full extent.
- Low cost of goods manufactured (COGM) which helps the company to create a wide customer base.
- A great P/E ratio of 8.29, which is believed to be better for investing purposes than the current 15.9 P/E of Polyus.
However, investing in Polymetal may involve some risks. For example, the firm is highly dependent on gold prices. At the moment, the company is benefiting from the present gold rally but may lose on exchange rates fluctuations caused by inflation and various market factors.
The dividend payout for 2020 was 96.1 rub. and a yield – 6.6%. The Board plans that the 2021 dividend payment will increase to 99.52 rubles per share.
Rosneft is one of the largest energy companies in Russia, with a headquarter in Moscow. It is engaged in several highly profitable oil and gas activities, the most important of which are:
- Exploration and production. In 2020, its oil reserves amounted to 25.8 billion tons, and the ones related to natural gas – to 2.1 trillion cubic meters.
- Processing, logistics, and sales. The company has large processing plants in Russia, Germany, Belarus, and India. In addition, Rosneft is also actively involved in the creation of oil refining facilities in China and Indonesia. Most of its gas is consumed domestically. By contrast, the bulk of Rosneft’s oil is supplied abroad.
The oil refined into fuel is sold on national gas stations. In addition to that, the company supplies other oil products and lubricants. There are more than 3 thousand gas stations in the country.
The company has plenty of important oil and gas projects, the most of which is located in the Siberia, Russian Far East, and the Taimyr Peninsula. One of them is a Vostok-Oil project, a site on the Taimyr, which is rich in premium oil with reduced sulfur content. The project is a key priority, not only for Rosneft but also for a national economy, as it is planned to be one of the main suppliers of the international pipeline into Europe (Nord Stream).
The key highlights in regards to the company are:
- It is ranked first in the world in terms of daily extraction of oil (5.2 million barrels per day)
- Its production costs are the lowest in the world ($2.8 per BOE(
- It has the largest reserve of oil in the world (152 billion BOE)
Quite a high volatility of the company’s financials is caused by the constantly changing conditions on the oil and gas market. The company profits depend on the following factors:
- Oil prices
- OPEC decisions
- International affairs
These days Rosneft has a fairy large debt burden, which in 2021 accounted for 5.1 billion rubles. The company financial statements show that the main source of its revenue is the sale of petroleum products. Profits are usually calculated in foreign currency.
According to the current dividend policy, Rosneft makes payments twice per year. Every stockholder is entitled to 50% of the company’s IFRS-adjusted net profit. The present dividend yield of 1.3% was caused by the recent global decrease in oil prices. There is an opinion that the situation in the 2021-2022 periods is going to get better, thanks to the higher future demand for black gold.
Sberbank is the largest national financial services company with a headquarter in Moscow. It also operates in a few post-Soviet countries as well as in Europe. The bank’s shares are the most liquid on the Russian stock market.
Sberbank’s business model consists of the following segments:
- Personal banking. This is one of the most important divisions, which provides financial services to the general public. Among them are lending and insurance products, non-state pension provision, credit and debit cards, etc. In 2020, the share of consumer loans in the domestic market was 42%, mortgages – 54%.
- Institutional banking. Sberbank has the largest database of domestic and foreign corporate and institutional customers with 119 digital products and services (by the 2020 statistics).
- Non-financial sector. This division deals with activities such as food delivery, e-commerce, entertainment, etc.
According to the 2020 results’ analysis, Sberbank’s financials are also the highest in the industry: of all the Russian banks it is the one with the greatest assets, capital, and loan portfolio. As of May 2021 data, its capitalization amounted to 6.8 billion rubles.
Sberbank is continuously exploring other areas of investments, for example, non-banking enterprises (e.g. DocDoc, Rabota.ru, RamblerGroup, etc.), and even the gaming industry by organizing a new sector “SberGames“.
The company’s main financial characteristics are as follows:
- The Bank’s net income, as well as its commission income, is steadily growing. Profits keep on increasing with each passing year too. Based on the results of 2021, which has not yet ended, it can be deduced that the company has already fulfilled its ambitious plan to earn 1 billion rubles.
- Capital and assets keep on their steady rise. And, judging by the accounting basics, this was partially caused by the growth of lending.
- The Bank’s loan portfolio is under unfaltering watch. The amount of unpaid consumer debts on its financial statements is pretty low and does not threaten the financial stability of the Bank. Its controlling stake, which previously belonged to the Russian Central Bank, is now in the hands of the Ministry of Finance.
Sberbank has the following key characteristics:
- huge growing potential
- fabulous profits
- attractive reporting figures
- great social and international repute
Based on the above information, it is not surprising that the Bank pays generous dividends to its investors by allocating to them half of its IFRS net income. In 2020 Sberbank paid each stockholder 18.7 rub. per share which yielded a 6% rate. Judging by the 10-month results of the current year, its dividends for 2021 are expected to be even higher.
This is one more Russian oil and gas company formed by merging a few former government-owned firms, located in Siberia. Surgutneftegaz’ divisions and operations include:
- Exploration. With the main goal to develop its raw material base, Surgutneftegaz doesn’t intend to remain at the achieved level and is constantly seeking new reserves. In addition to the geological survey, this also includes purchasing new and exploited fields and deposits. Surgutneftegaz is a high gross margin business that accounts for 27% of the total national exploration works.
- Mining. The company extracts gas and oil on the territory of Western and Eastern Siberia. In the crisis 2020 year, the volumes have slightly decreased, but, nonetheless, the production of oil amounted to 54.8 million tons, and gas – to 9.10 billion cubic meters. The 2021 figures are going to be approximately the same or even more.
- Oil and gas refining. About 17 million tons of oil per year go through the pipelines to the Leningrad region to be processed at the local refinery Kinef. The gas processing plant, located in the Siberian Yugra region, refines the “blue fuel” (approximately 7 billion cubic meters a year).
- Trading and sale. The company sells oil and gas products locally and abroad. Among its largest customers are large state and municipal organizations, shipbuilding, metallurgical, agricultural, and other industries. As for petroleum, it is sold, for example, as a fuel to the mushrooming in the country motorway filling stations.
- Electricity generation. Decentralized generation of own electricity allows the organization greater flexibility, diversity, and independence. This is why Surgutneftegaz has developed its own electrical stations based on its own fuel. As a result, all operating activities of the firm are conducted continuously and independently.
One of the main strengths of the firm is its ability to maximize its long-term free cash flows. The non-stop creation of positive cash flows shows that the company has a huge capacity to expand and grow, pay its dividends, and easily manage unpredictable difficulties. What is more, Surgutneftegaz has recently doubled its cash flow figure, which is an even greater sign for investing in its stocks.
Surgutneftegaz pays ordinary and preference dividends. The latter is a type of dividends paid for preference shares, owing which allows a stockholder to enjoy the privilege of getting fixed dividends paid before others. In terms of the total consideration, the company’s 2020 payout was 6.72 rub per share with an annual yield of 17%.
As for 2021 data, the company announced a slight reduction of its ordinary dividends, although the exact value of this year dividend is not yet known.
The 2021 P/E ratio accounts for 4.08, which is considered to be a bit lower than it might be, especially in comparison with its closest rivals. What is more, it is still not clear who owns 40% of the firm’s shares.
Tatneft – is a colossal oil and gas corporation with vertical integration. About 86% of its revenues are generated by the extraction and processing of oil.
The main Tatneft areas of activity are:
- production and refinery of gas and oil
- oil and gas chemistry
- tire production
- fuel filling stations
The quality of Tatneft’s oil refining is considered one of the best in the country. The main production is concentrated in the complex Taneco.
The company’s main shareholder is the Tatarstan government (34% of the stock). The firm considers its dividend policy as one of its highest priorities. Payment of stable or rising dividends is the dominant credo that the company has been and will be following for many years.
Tatneft’s long-term strategy up to 2030 includes:
- increase of oil production up to 38.1 million tons per year
- scaling up refinery volumes up to 14.8 million tons per annum
- enhancing of processing depth to 99%
- achieve EBITDA of 512 billion rubles
- rise the company capitalization to $36 billion (under the baseline scenario)
Anyway, the success of the above plans will be partially dependent on the oil and gas market situation (e. g. energy prices, OPEC decisions, etc.) So far, high quotations for black gold and blue fuel contribute to the growth of the company’s profits.
Some features of the latest financial results of Tatneft are:
- In 2020 the company wasn’t able to maintain the previous year net profit, which decreased nearly by half – to 104.6 billion rubles. But in 2021 the return to pre-pandemic results is expected.
- Nevertheless, the total level of 2020 debt decreased (compared to the 2019 figure) to 34.6 billion rubles.
- The 2020 P/E ratio came to the reasonable rate of 11.6
- Net Debt to EBITDA – to 0,04
As has been already mentioned, the firm has always kept the rule to pay dividends to its stockholders. Since the moment it adopted IFRS, its payout has always been 50% of its net profit, or even more. The 2020 dividends were 22.24 rub per share with a yield of 4.7%.
Yandex is the second most popular in Russia search engine and a huge multinational corporation. It is registered in the Netherlands and conducts its business not only in Russia but in many other countries. Its apple’s business model is based on novelty, innovation, and a consumer-centric approach. The end purpose of Yandex is not to sell its products but to provide an exceptional surf experience to its consumers.
Today Yandex is ardently developing both online and offline formats paying special attention to advanced technologies and global presence.
The major activities of Yandex are:
- Web-portal and search engine
- Online advertising
- Cloud computing
- Geolocation services
- Online trading and marketing
- Other internet-based services and products (weather, mail, taxi, etc.)
The principal source of Yandex income has traditionally been advertising that is integrated into all its services and applications. The company’s main competitor is the American corporation Google.
Chalk Up! According to the results of the survey, by the end of 2020 Yandex became the most popular search engine in Russia (59.2%), which was its first victory over Google.
The main financial characteristics of the company are:
- The steady and rapid growth of operating expenses, accompanied by the simultaneous growth of profits.
- Similar growth in assets, which volume over the past 5 years has been nearly quintupled and came to 517.8 billion rub.
- As per the 2021 preliminary results, the Group market capitalization has reached 1.9 trillion rub.
- The company’s latest P/E amounted to as high as 93,4.
Nevertheless, the present dividend policy of Yandex is no dividends at all as it keeps on following its rule of using all profits for further development.
The key aspects of Yandex are as follows:
- Diversification of business and development of new strategies
- Belongs to the IT-sphere that’s always been very attractive for investors
- Financially rich, a real big-ticket
- Dependent on the state of the global technology
- Represents a dynamic but sometimes controversial area compared to more physical fields such as retail or oil and gas industries
Yandex is a strong blue chip of the Russian stock exchange. The financials of its domestic internet-based competitor VK is noticeably lagging behind it. In addition, Yandex’s presence and its services have incorporated into the lifestyles of both Russians and other countries’ dwellers. And if the company’s products continue to resonate with users, it has excellent prospects for the future.
How to buy Russian blue-chip stocks
First of all, you have to open an account with a broker. Register with a Russian or your local broker suitable to your needs but don’t grab the first one you see on the web. Make a small research and read the customer testimonials or the web page of an independent expert. Compare their rates and fees but do not choose the cheapest one.
In certain ways, a brokerage account is like a bank account, but there are a few important differences. You cannot use your investment account for purchasing goods and services, except for buying and selling securities. These days your physical presence for registering is not required, you can easily register with any broker you’ve chosen online or through a mobile application.
The next step is a trading terminal’s installation. Brokers usually offer to invest through 3 following tools:
- QUIK. This is a trading terminal that allows trading on stock exchanges. You don’t have to be computer savvy to install Quik, and the process is pretty straightforward. After installing, you can do practically anything you want with your investments.
- The website of your broker. If you are too busy or simply don’t want to download and install anything you can easily buy the blue chips stocks through the website of your brokerage company.
- Mobile app. This is the most popular way for many investors that allows you to stay in the loop regardless of the place and time. Nearly all modern trading apps are compatible with Android, iOS, and other smartphones’ types. Registering is quick and easy.
After the registration, you can start placing orders to purchase blue chips’ stocks or, vice versa, sell them.
As it was mentioned earlier, blue chips are highly liquid, and the orders for them are usually processed in a jiffy. Purchasing a stock is a popular but hardly the only method of investment. You can use other tools such as ETF or UIF (the latter stands for a unit investment fund) that mean a collective investment of a few securities in one package.
Among the popular investment funds are:
Purchasing of these kinds of portfolios suits small-scaled investors. A price per one blue-chip share can be in the range from 1 to 25 thousand rubles but purchasing them in a form of UIF or ETF is a great way to save on the investment.
The advantages of purchasing stocks via ETF or UIF are as follows:
- Diversification of investment
- Lower costs
- access to a wider market
However, there are a couple of disadvantages such as:
- high management fees
- low potential profitability
Not all funds pay dividends. Most businesses that manage such funds use dividend payments received from the companies for the purchase of new shares. On the one hand, this benefits the investor who doesn’t have to pay taxes on dividends, especially considering the fact that the unit value is often growing. On the other hand, there is no constant dividend flow that can be used for other investments such as buying currency, gold, or bonds.
Chalk Up! There is an expert opinion that purchasing one or two blue chips is pretty risky.
Summing up what has been said, if you want to buy a blue-chip stock you have to:
- Open a brokerage account
- Install trading terminal on your computer or mobile
- Have a minimum of 1 thousand rubles (an average cost of one Russian blue-chip share).
If you want to create your own independent portfolio of blue chips, you need about 100 thousand rubles. This is a necessary minimum that will enable a proper diversification of investments in various industries.
Pros and cons of investing in Russian blue chips
Purchasing shares of Russian leading companies might be a good type of investment, provided that the risks are justified. Let’s take a look at the strengths and weaknesses of such a decision.
The blue chip advantages:
- High liquidity. Highly liquid shares allow you to quickly buy and get rid of them. Because of their excellent reputation and numerous qualities crowds of people want to have them. In addition, due to their low volatility blue chips do not imply quick money for stock speculators, who in this respect are more attracted by volatile medium- and small-cap securities.
- Strong security. All blue chips are highly reputable corporations that represent areas of social significance for the state. If such a giant faces bankruptcy, this would be a pretty heavy blow to the industry and the national economy. This is why the government is interested in the blue chips’ stability and supports them in every possible way and very often – through allocating grants or even through its presence in their ownership.
- Favorable dividend policy. Persistently positive cash flows and low debts of the companies we cover create excellent conditions for dividend payments. As a result, their shareholders enjoy stable and even rising dividends against the background of small and medium scale enterprises with unfavorable dividend policies. Because serious investors are always interested in companies, whose large dividends allow them to steadily thicken their investment portfolios.
- Regularly excellent financials. Blue chips satisfy indispensable prerequisites needed for the constant generation of perfect financials. This allows them to thrive and survive throughout the years, even in the most difficult times, when the majority of others experience decline and disunity. This is exactly what happened during the period of the pandemic blow that once again proved the blue chips’ potency, sustainability, and thick net profits. All this is a highly attractive sign for sensible investors.
- Resilience to crises. Periodic crises reveal the contradictory and unsustainable nature of some enterprises. The recent pandemic crisis, for example, affected many business and economic processes including the corrections of the global stock market where blue chips proved themselves as the most viable and sustainable organizations. Their market graphs have been much smoother than the ones of other smaller-sized businesses who have been facing financial challenges caused by the pandemic.
- Low volatility. One of the most important reasons for the blue chip’s low volatility is its vitality and high quality. This inevitably affects the investor portfolio making it also more stable and less volatile. And this becomes particularly valuable during times of financial crisis.
- Diversification. This mostly refers to currency diversification but doesn’t exclude the entire diversification idea (relating, for example, to the business’ operations and the investments’ portfolio). Many corporations receive part of their revenues in foreign currency while their expenses are denominated in a ruble, which allows them to avoid risks associated with the devaluation.
Disadvantages of investing in blue chips
- Low growth potential. Most blue chips are industry giants that have long been like this for years and years. This is why today they grow at a much slower rate than smaller and younger enterprises. They have already achieved high performance and simply by any natural law cannot keep on developing as quickly as they did it before.
- Overvaluation of stocks. In short, blue-chip stocks are usually overvalued simply thanks to their high reputation and the consequent natural human desire to own them. As a result, many people intend to buy such stocks at any price, which makes their issuers overvalue them. Overvaluation can usually be defined from a close analysis of the firm’s financial statements, which helps to find a fair value of the company stocks. Therefore, each investor should have a basic knowledge of important ratios that affect the dividend calculation. In any case, if the dividend is overvalued, it’s better to wait until it would be corrected by the innate mechanisms of the stock market.
- Risks associated with evolutionary development. This is primarily refered to the global ecology and ecological responsibility, which makes leading world economies turn to the development of green technologies. Today, there is a widespread opinion that environment-friendly technologies should be the basis of any economic sector. The markets are facing a rapidly increasing spread of “ecologically responsible investors”. This is why Russian oil and gas giants may soon experience great difficulties connected to the global desire to abandon the exploration and extraction of oil and gas.
If this is the case, the profits, as well as the stocks of Russian oil and gas corporations, would significantly decrease. The global expansion of electricity-based vehicles may transfer them and their securities into rapidly declining and approaching their collapse businesses.
- Relative attractiveness when compared to the blue chips of more developed states. Leading European or American corporations and their stocks are considered to be more stable and resistant to crises. One of the most important factors is that they earn their profits and generate yields in more stable currencies.
- Dependence on sanctions. Any sanction imposed onto some action of any company is nearly automatically perceived by the market as a negative sign that leads to the fall of share prices and the resulting devaluation of the entire stock. This is especially important for those who consider investment into industrial Russian companies exposed to the expansion of green technologies (f. ex. oil and gas corporations).
- Dependence on market conditions. Most of the Russian blue chips belong to industrial sectors such as mining and extraction of gold, ore, oil and gas, etc. Their financial performance strongly depends on the situation on the market of the corresponding commodities usually valued in foreign currencies. The fluctuations of exchange rates have a great impact on the company’s profits and its stocks. The Russian ruble, from this point of view, is a pretty risky currency due to its great exposure to devaluation.
- Prerequisite for long-term investments. The mentioned above the low growth potential of a blue chip makes its securities unable to skyrocket in days or weeks. But they are considered to act perfectly from the long-term point of view. They are for far-sighted and patient investors.
Conclusion: Is it worth investing in Russian blue chips
If your goal is to make a long-term but not an immediate profit, then investment in blue chips can be a sensible and attractive option. This is certainly not for speculators who want to make money here and now but for far-sighted investors who are used to thinking about the future.
When making a decision to buy blue chips, it is also necessary to take into account the peculiarities of the Russian financial market.
According to most independent sources, Russia does not belong to the list of 25 developed countries (by their GDP) and exploration of natural resources accounts for a large part of its economy. Consequently, the bulk of Russian blue chips are large mining companies, and the state budget shows high dependency from the export of the extracted by them resources.
Russia is also a country exposed to many geopolitical risks. Some Russian blue chips are engaged in activities that sometimes fall under the sanctions of a particular country or organization, which often has a negative impact on their stocks and, consequently, on the portfolios primarily consisting of such stocks.
Nevertheless, if you have in mind diversification of investments and a few years’ return, investment in stocks of leading Russian companies seems to be a reasonable and worthwhile decision. Just make sure to reduce your risks by putting your money into a bunch of different Russian blue chips.