Why I Sold CPFL Energia in my Dividend Income portfolio

01/22/2013 5:41 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

On January 11 in my post http://jubakpicks.com/  I sold Brazilian utility CPFL Energia (CPL) out of my dividend income portfolio http://jubakpicks.com/ . As of the end of 2012 I had a loss of 2.5% on this position (including dividend income.)

The logic behind this sell is pretty simple. As part of Brazilian President Dilma Rousseff’s drive to take costs out of the Brazilian economy, Brazilian utilities have been told to cut the price they charge for electricity if they’d like to see their concessions on electric power plants renewed. I think that’s good for Brazil, which has some of the world’s highest electricity costs, but it’s not good for revenue and cash flow at Brazil’s utilities.

Since the announcement of the new policy on September 11, shares of Brazil’s utilities in general have taken a beating. In particular the New York traded ADRs of CPFL Energia are down 8.6% from September 11 through my January 10 sell call.

What concerns me about CPFL Energia as a dividend stock is that the utility has paid out 95% of net income as dividends on average over the last seven years. The payout ratio hit 100% in the third quarter of 2012. That doesn’t leave CPFL with any room to increase dividends if net income falls as a result of new government initiatives. (The company’s dividend policy requires a minimum 50% payout.)

I don’t think the September 11 policy change is the last one that Brazilian utilities are likely to see either. With economic growth in Brazil still sluggish, I expect to see the Rousseff government attempt to reduce costs further through measures such as pushing down the interest rates that bank’s charge to another whack at utility rates.

This isn’t the kind of stable, predictable environment that works best for investing in utility stocks. I’d keep an eye on the shares because the company does have substantial new generating capacity coming on line and an acceleration in Brazil’s growth rate would lead to an increase in electricity sales. But right now I’m willing to step aside until the dimensions of the government’s plans are more certain.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of CPFL Energia as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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