"Alrosa" will pay dividends in a new way

The company will pay at least 50% of the free cash flow.
The world's largest diamond producer, Alrosa, has approved a new dividend policy. Now payments will be made not from net profit, but from free cash flow, Vedomosti was told by a person familiar with the company's managers and two officials in the financial and economic block of the government. The new dividend policy can begin to operate already in 2018. The representative of "Alrosa" confirmed that the Supervisory Board agreed the main parameters of the company's financial and dividend policy proposed by the management, noting that the final approval of the documents will be held in September. Details of dividend policy, he did not specify.

According to two interlocutors of Vedomosti, payments to holders of securities will be at least 50% of free cash flow. Another interlocutor says that up to 100% of this indicator can be channeled to dividends. Free cash flow in 2017 amounted to 73.5 billion rubles. Thus, for 2017, "Alrosa" could send dividends from 36.75 billion to 73.5 billion rubles. But even on April 28, the Supervisory Board of Alrosa recommended that shareholders allocate 38.59 billion rubles for dividends in 2017, or about 50% of IFRS net profit. The annual meeting will be held on June 26 and these recommendations remain in force, says one of the officials. Payments of dividends from free cash flow this year are possible, but not earlier than August-September, he emphasizes. This will happen, if Alrosa starts paying interim dividends, this possibility was discussed, the official adds.

Calculating dividends from free cash flow is the most honest way to pay dividends, says Maxim Khudalov, an analyst with ACRA. After all, this is a real, not a calculated indicator of the company's performance. Net income may be overstated or understated depending on so-called paper items that do not affect real revenues, such as revaluation of shares in subsidiaries.

The official said that the dividend policy was changed due to the company's lack of large investment projects for the coming years. And the restoration of the Mir mine (Yakutia), which was flooded in August 2017, is still at the stage of development of a feasibility study and the company has no clear investment program, he stressed. Earlier, Alrosa's dividends were paid out of net profit and could not be less than 35% of this indicator.

All last week the company valued. At the Moscow Stock Exchange, its capitalization increased by 9.8% to 725.4 billion rubles. Investors are interested in the new dividend policy, as it makes payments more understandable and allows for more parameters to be taken into account, experts agree.

"Calculating dividends from free cash flow, rather than volatile net profit, will make payments more predictable, which investors can not help," says Aton analyst Andrei Lobazov. If the maximum payments amount to 100% of the free cash flow, investors can expect a dividend yield of around 10-12%, he points out. Binding into free cash flow helps when paying dividends to take into account the intensity of capex, as well as the size and cost of debt, notes Nikolay Sosnovsky, director for metallurgy and mining at Prosperity Capital.

Khudalov is sure that the new dividend policy will allow for insurance if the capital costs for the restoration of the "World" are higher than expected. Free cash flow just allows for capital expenditures, the expert points out. "After the tragedy at the Mir mine, it will be better if the company makes all the necessary investments to modernize production and increase its safety, even if in the short term dividend payments are affected," Khudalov said. This will attract long-term investors: they will see that the company is investing money in development, which means that the value of securities will be long-term beneficial, the expert believes.