Latin American Utilities For Growth And Income

By Aaron Levitt | May 05, 2010 AAA

Latin America as a region has avoided the worst of the financial crisis. Combing strong international reserves, manageable debt and a financial system that was not exposed to toxic assets or reliant on foreign funding to the extent of some other nations, the region has steered its ship past the major icebergs. Its economies, which once were fraught with periods of strife, hyperinflation and meltdowns, have become one of the major catalysts for future global growth.

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Through the latter part of 2009, investors returned to the risk trade, looking for quickly growing assets, including Latin American securities. Now, analysts are warning that many asset classes have reached their highs. The iShares S&P Latin America 40 Index (NYSE:ILF) was up approximately 100% in 2009. Investors have shifted their focus to manage risk and return to dividend and value oriented investing. Investors shouldn't give up on emerging markets just yet. While volatile, these markets can help power a portfolio past the ugly hand off inflation and produce great gains. Ignoring them for long-term portfolios just isn't an option. However, there are ways to play them that help reduce risk, while still playing the powerful consumer driving thesis.

Flipping a Switch, Turning a Tap
Traditionally a boring sector, utilities provide all the necessities required for modern life; electricity, water, gas, phones etc. The overall sector represents stable cash flows and recession resistance. For emerging markets, utilities provide access to a growing business environment, which will cause growing incomes and demand for their services. They often pay outsized dividends which can help cushion the volatile nature of their home markets or provide a nice paycheck for those seeking to replace lost income.

Adding the Service Providers
While there are a few exchange traded funds that track foreign utilities such as the SPDR S&P International Utilities Sector (NYSE:IPU), there are no emerging market utilities based funds, yet. We'll likely see one, eventually. However, due to their capital intensive nature, many strong foreign utilities have IPO'ed on U.S. exchanges and trade as ADRs. Investors have a wide range of choices for choosing Latin American stocks within the sector. Here are a few top picks.

CPFL Energia S.A. (NYSE: CPL) is one of the top yielding electric companies, foreign or domestic, currently paying a healthy 6.9% dividend. With a market cap of nearly $10 billion and controlling 13% of the Brazilian power market, CPFL reported earnings growth of 66%. Analysts predict earnings growth in the 55-57% range for the current quarter.

Just as important as current yield, how a company grows that distribution over time is the hallmark of good income investment. Having a dividend growth rate over the past few years of 54%, Companhia Energetica de Minas Gerais (NYSE:CIG) or CEMIG has one of the fastest dividend growers in the sector. Earnings grew at an incredible 140% over the last quarter and the shares yield 4.7%.

Companhia de Saneamento Basico (NYSE:SBS) is Brazil's largest water utility with nearly 197 water treatment facilities and 438 sewage treatment facilities. The company pays a 2.92% dividend, but the real kicker is that shares of the water utility trade for a P/E of 17, and are well below its book value of $53.

Companhia Paranaense de Energia (NYSE:ELP) is an electricity generator and distributor in Brazil's Parana state. The company also functions as telecommunication and I.T. provider through various partnerships it has developed. COPEL has a strong balance sheet with net cash of R$23 million ($13.1 million in U.S. Dollars), and pays a small dividend. Shares trade at cheap P/E of 7.82.

The Bottom Line
Latin America is one better positioned region in the emerging market space for continued portfolio growth. Adding a touch of utilities allows investors to stay invested in the nations and the growing consumer story, while managing risk. The previous picks along with Centrais Electricas Brasileiras (NYSE:EBR) are excellent ways to play that sector. (This asset class has left much of its unstable past behind. Find out how to invest in it. Read Investing In Emerging Market Debt.)

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