Since my last article on Gazprom in June, it has returned around 24% including dividends.
The Power of Siberia pipeline to China has been filled with gas, with deliveries scheduled to start by the start of the new year.
Denmark has approved the Nord Stream 2 pipeline, clearing the final hurdle for its completion.
Likelihood for another big dividend raise remains.
Investors need to be aware of the various risks involved.
As first discussed in my article around 5 months ago, Gazprom (OTCPK:OGZPY), the owner of world's largest natural gas reserves, is finally proving to be a good investment, as it going through a shift in strategy. Where previously Gazprom allocated its capital questionably, the Russian government now wants to make the most of its stake in the company, and that has resulted in a bigger focus on profitability and, more importantly, a very shareholder-friendly dividend policy. It has paid out record high dividends in 2019 after doubling the dividend (in ruble terms), and has returned around 24% including the dividend payout since the article was first published in June. With positive recent developments regarding both major pipelines connecting Gazprom to Europe and China, the uncertainty over this company has been lifted. And whilst political risks remain, I am confident that Gazprom will deliver another big dividend raise in the coming year, which will take the stock price higher with it.
Source: Gazprom Investor Relations - Welding of the first joint of "Power of Siberia"
Power of Siberia
Gazprom announced on October 29th that the Power of Siberia pipeline has now been filled with gas and that the company is ready to start delivering pipeline gas to China. Gas flows are expected to start by the end of the year. Those huge projects are often plagued by unexpected delays and complications, so it is great news that the natural gas deliveries are set to start as projected.
Gas to China via Gazprom's East program will be delivered in accordance to the huge 30-year deal signed back in 2014. Per the contract, 38 billion cubic metres of gas will be delivered to China annually, for a total of over 1 trillion cubic meters during the lifetime of the contract.
This contract is huge for Gazprom, as it opens up a massive new market for the company's natural gas. With the ambitious energy reform implemented by the government in 2017, China is moving away from the coal-powered energy to combat the ever-increasing air pollution. The company is set to benefit from the increased demand as industrial facilities and millions of homes are mandated to change their coal-based energy systems to ones that either use renewable energy or natural gas.
Source: Gazprom Investor Relations
There has also been positive news regarding the other major pipeline project, the NordStream 2, which connects Russia to Germany and will double the capacity of the initial NordStream pipeline to 110 billion cubic metres. The Danish government has finally given permission for the pipeline section to be constructed in Danish waters, removing the final hurdle to its completion. Whilst US political opposition to the pipeline remains, the $8.9 billion pipeline project is half-funded by major European energy companies and is nearing its completion.
Source: Gazprom Investor Relations
Dividend and Valuation
The dividend yield of the ADR is 6.2%. The current payout ratio is at 27%, leaving a lot of room for raises to the target payout ratio of 50%. Gazprom has stated that it will increase the dividend payout to 50% in 2-3 years. When the company finally achieves that, investors today will have a solid double-digit yield on their investment.
Even with the big run-up in the stock price this year, it is still trading at under 3.5 times earnings.
The fact that Gazprom is a state-owned enterprise has been a major catalyst lately, as it has forced the company to move to a more shareholder-friendly policy to boost the government's budgets. The state ownership can just as easily turn into a negative, as it is hard to predict Russia's domestic policies and the geopolitical risks. Previously, state-owned enterprises were a vehicle for the government to boost Russian GDP, so there is always the risk of the company allocating money not in shareholders' best interests but rather to boost Russia's economy. The largest shareholder (the Russian government) will do what is best for the country. The latest policies implemented do indicate that the government wants to make the most of their shares in the state-owned companies, and their interests are therefore aligned with other shareholders.
Additionally, the threat of US sanctions remains. The worst-case scenario for the share price regarding pressure from the US would be if investors are banned from owning Russian stocks, which would drive the share price down. However, there is not much the US can do to disrupt Gazprom's business itself, and the US LNG simply cannot compete with Gazprom's pipeline gas prices in Europe.
As stated in my previous article, currency risks remain the biggest concern for foreign investors investing for dividend income, as the dividend is announced in ruble terms.
Gazprom gives investors a chance to benefit from the state-implemented dividend policy, which will provide a big boost to the already large dividend. Some short-term risks regarding the two major pipelines have been resolved but the long-term political risks remain. Personally, I invested in Gazprom in December and March and made it my biggest holding. It has returned over 86% and gives me a yield of 11.4% on my investment. After the big dividend raise, Gazprom's dividends now make up too large of a percentage of my dividend income to add to my position in this company. However, I would still recommend risk-tolerant investors looking for increasing income to have a deeper look at this company if they are comfortable with the risks involved.
Disclosure: I am/we are long GAZ.DE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am invested in Gazprom through the DR listed on Frankfurt Stock Exchange.