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  • Lukoil: Russian Spice For Your Growing Dividend Regale

    Russia and all EM have been under pressure in the recent period of time. Market Vector's RSX is losing 2% against S&P500 +18.5% since September 2012. When investors definitely favor DM , isn't it a good time to increase the exposure in EM? I personally prefer stock picking to indexing that is why I propose to have a look at Russian oil giant Lukoil (OTCPK:LUKOY) from the growing dividend strategy perspective. It might be a good addition to your portfolio if you seek diversification and EM exposure as well as it may serve as a perfect source of your future cash in hands.

    Lukoil demonstrated impressive dynamic growth of its business during post-Soviet era and have become largest independent Russian oil company producing 2,15 mln. barrels of hydrocarbons per day.

    Lukoil increased its dividends every year through last 15 consecutive years. Here is the recent history while the stable Rub/USD exchange rate was observed:

    YearDiv, rub.Quote, rub.Div.yeldDiv.growth
    2012901 735.004.52%20%
    2011751 735.004.32%27%
    2010591 863.503.17%13%
    2009521 600.023.25%4%
    2008501 631.513.06%19%
    2007422 387.001.76%11%
    2006381 916.001.98%15%
    2005332 508.001.32%18%

    *Rub/USD on 12/31/01 = 30.14, Rub/USD on 12/31/12=30.37

    Average dividend yield on ex-dividend date is 3%, average dividend annual growth rate is 17%. Current Lukoil payout ratio is 40%. Forecasted 2013 dividend = 100 rub, 5% yield to the current price, 50 rub. of them already announced as 1H 2013 dividend.

    Company's President and the major shareholder Vagit Alekperov recently announced company's long term strategy which makes the company a must-have pick for a dividend growth investor having in mind low multiplies Lukoil is trading at now:

    Lukoil will increase its payout ratio to 60% within the next 10 years, Lukoil will continue to grow its dividends by 15% annually within the mentioned timeframe and thus the dividend amount will grow 4x times in 10 years.

    There are factors in place, which makes me believe that these plans may come true:

    - Lukoil's top-managers continuously increase their shares, currently controlling 47.62% of the company,

    - CAPEX is planned to peak in 2013, huge upstream investments are completed, that is a big differentiation point from governmentally owned Rosneft (OTC:RNFTF) which will definitely face huge investments in new politically important, but economically uncertain projects like Russian Arctic.

    - 15 years of continuous dividend growth is a reassuring factor.


    - Usual Country risks are in place: property laws doubts, Yukos case, FX rate.

    - Usual sector risks are in place: shale oil boom, cheap energy.

    - Acquisition by Rosneft is treated as a thread by the market however this is very unlikely as Lukoil's majors stated many times that they will not sell their stakes. Rosneft is big enough, will face Russian anti-monopoly restrictions if further acquisitions happen. Alekperov stated that further M&A deals may harm Russian oil industry perspectives.

    - Production decline. 2012 daily production declined by 1.5% comparing to 2011. Lukoil tries to compensate Russia production decline investing to projects abroad: Kazakhstan, Iraq. Foreign projects IRR is often questioned by the market.


    Current dividend yield of 5% and growth potential of 15% annually makes Lukoil's risk/reward ratio extremely attractive to me. I have a big portion of Lukoil in my dividend-oriented portfolio.

    Disclosure: I am long OTCPK:LUKOY.

    Sep 13 11:47 AM | Link | Comment!
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