Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
As stock markets continue to make new highs, it has become exceedingly difficult for us contrarian value guys – read “cheap” – to find stocks to add to our portfolios. The latest purchase took us well around the globe to Moscow, where Mobile TeleSystems Public Joint Stock Co. (MBT), a Russian entity trading as an American depositary receipt on the NYSE, was calling our name. It was purchased at US$8.19 in April and currently trades around US$8.65. Worth noting is that the stock price just fell because of a sexy dividend of 73 US cents.
As its moniker suggests, MBT is in the telecommunications field. Like many of its brethren, it focuses on the internet, cloud computing, pay TV, cellphones, financial services and music, and it also owns e-sports clubs. It was founded in 1993 and is a subsidiary of Sistema Public Joint Stock Financial Corp.
One of the major negatives for anyone considering buying this enterprise is that Russia is akin to the Wild West. According to corruption watchdog Transparency International, the country ranks as the 129th worst in the world. While it whips Somalia or Sudan, countries such as Egypt and the Philippines look like a rule of law oasis in comparison to Russia. A high level of corruption has implications when it comes to financial reporting, transparency, accounting and even basic investor protections.
Might the powers that be just nationalize MBT and line their own pockets? Unlikely, but not out of the question. Plus, the Russian economy is struggling, and interest rates have been rising. The ruble, not the most stable currency, could possibly fall a long way. And though President Vladimir Putin has extended his potential reign through 2036, there is certainly opposition, particularly in the followers of Alexey Navalny. Political unrest could be in store, but Mr. Putin has been exceptionally good at burying resistance.
There are other negatives. On this side of the world, the U.S. could decide to delist the ADR if push comes to shove. The credit rating is barely investment grade, and equity has fallen 80 per cent in the past five years while total liabilities have more than doubled.
When viewing other countries where MBT operates, it is a who’s who of instability. These include Armenia, Belarus, Turkmenistan, Ukraine and Uzbekistan. Turmoil can break out at any moment.
However, there are many reasons why this is an enticing enterprise. The income and cash flow statements have posted steady revenue growth and produced consistent profits and cash over the past decade. The share count has been shrinking, to 880 million from 995 million in 2016, with further buybacks in store.
Then there is the dividend. It is normally paid twice a year and can vary quite a bit. Over the past three years, it has been as low as 22 US cents and as high as 60 US cents. While this dividend volatility may turn off investors, it is worth noting that the payout ratio is often well under 100 per cent of earnings and fairly conservative compared with many Western peers.
Moreover, the relatively newly minted president and chief executive officer, Vyacheslav Nikolaev, has stated that he would like to see it go up next year. It is reasonable to think that the coming rate will be at least 6 per cent. If markets take a beating, this will likely be a handsome coupon to clip, albeit the stock price will also likely fall. Worth noting is that last year the company was doing so well, a bonus dividend was thrown in – always a pleasing event.
Though a rookie in the head honcho position, Mr. Nikolaev has been with the organization since 2004, working his way up through the ranks. He appears very competent. In addition, this company is an enterprise where many top people in the industry desire to work.
Russians are cellphone crazy and there seems to almost be a competition among the youth to have ones with lots of bells and whistles. Sound familiar? And it’s not just young people. Smartphone penetration has reached more than 66 per cent of the population, which puts the country ahead of China and Japan. In addition, MBT has some great partnerships, including with Ericsson, Huawei, Qualcomm and Vodaphone. This is helpful as the company forges ahead with 5G.
Mobile TeleSystems continues to grow. This month it announced the takeover of GDTs Energy Group LLC. This data centre was started in 2018 and already has hundreds of clients. Plans are to triple its size in the next couple of years. When finished, the enterprise should rank as one of the top five in Russia, with a focus on Moscow, where there is about four-fifths of the market.
Some investors, including us, might like this outfit as it offers a diversification tool outside North America, along with currency diversification. Some might wonder if the ruble is the way to go here, but it checks a box for “exposure to emerging markets.”
For the President’s Portfolio at Contra, these were all factors in the purchase, plus being a leader in the tech field. A dividend being maintained seems like a pretty reasonable assumption. The big question is whether the capital appreciation anticipated will arrive. The initial sell target of US$18.74 is less than half the approximate US$40 where the stock traded previously. If it reaches the goal, it just might blow through it.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.