Sunday, June 10, 2012

Brazilian Utility CPFL Energia Pays Big Dividend With Steady Growth

June 9, 2012 | 7 comments | about: CPL, includes: CIG

Recently I wrote an article on a high yield electric utility company from Brazil - Companhia Energetica Minas Gerais, or Cemig (CIG). In the comments a question was asked concerning the choice between Cemig and its major competitor, CPFL Energia S.A. (CPL). Both companies trade in the U.S. as American Depository Receipts - ADRs.

The two companies are similar in size with a $14.9 billion market cap for Cemig and CPFL Energia is currently valued at $11.8 billion. CPFL Energia generates 62% of EBITDA from distribution while Cemig earns 40% from distribution and the balance from generation and transmission of electrical power. Each company provides about 12% to 13% of the total electrical power sold in Brazil.

CPFL Energia provide electrical power primarily to two regions. One area is the region around Sao Paulo and the second is in the far south of the country along the Atlantic coast. Both are among the fastest growing areas of Brazil. For new power generation capacity, the company is strictly focused on renewable energy including hydro, biomass fired power plants and wind turbines. CPFL Energia became a publicly traded company in 2004 and since that time, revenues have steadily increased with an average annual growth rate of about 6%. Since the IPO, the split-adjusted share price has increased from around R$8.50 to currently trading in the R$24 range.

In July 2011, CPFL Energia declared a reverse stock split/forward stock split resulting in an effective two-for-one stock split. At the same time the ADR ratio was change to two Brazilian shares for each U.S. traded ADR shares. Now that the Real has devalued to around two to the dollar - R$2.04 today, June 8 - the BOVESPA share price and the ADR price are similar, R$24.57 and $24.23 on June 6 respectively.

CPFL Energia pays dividends twice a year - with record dates in April and August and payment dates in May and October. Since going public, the company has paid out 95% of net income as dividends. The dividends paid have grown steadily, keeping the yield in range of 6% to 9% as the share price fluctuates. There have been periods of time when the dividend did decline as net income dropped off from previous years before resuming a growth pattern. The dividend payments are not as consistent as practiced by many U.S. companies, but over a multi-year period, CPL ADR investors should see a very nice dividend return on their investment.

Values on the Brazilian stock market tend to take much larger swings to both the upside and downside when compared to the U.S. market. Investors may want to attempt to time purchases or leg into a position. When CPFL Energia is compared to Cemig, the latter has been more generous with both cash and stock distributions while CPFL has been the better share price performer over most time frames. Some ADR shares of both may the answer for an income investors portfolio.

(click to enlarge)