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Dialing Down to Rio for High Yield

03/12/2009 1:00 pm EST


Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of The 25% Cash Machine, says a giant Brazilian telecom company provides strong growth and pays a fat dividend despite the global economic crisis.

Brasil Telecom Participacoes SA (NYSE: BRP) is one of the largest telecom providers in Brazil, despite being barely more than a decade old. The company is much like a Brazilian version of AT&T (NYSE: T) or Verizon (NYSE: VZ) in that it provides landline and mobile services.

Brasil Telecom definitely has room to grow, as it has only eight million landline customers in a country of 190 million people, but it appears the company is more focused on growing its mobile and Internet customer bases, which number 5.6 million and 1.8 million.

The best part of an investment in Brasil Telecom shares is a hefty $3.36 annual dividend, which works out to be an almost 11% yield. This is paid against estimated 2009 earnings of $4.57 per share, reflecting dividend coverage of 1.36 times. BRP actually upped its dividend payout by 20 cents recently, reflecting not only their solid cash flow generation but also attractive operating margins from the growth in wireless and broadband services. (BRP’s dividend payment schedule is random—no set dates. They are declared on an irregular basis.)

[Last month,] the company posted its fourth-quarter 2008 results that showed continued steady growth. BRP registered consolidated gross revenue of 17,007.1 million real, up 6.3% year-on-year. Consolidated net income came to 782.2 million real, up 16.2% from 2007. Earnings before interest, taxes, depreciation, and amortization (EBITDA) reached 3,936.7 million real in 2008, and EBITDA margin came to 34.8%.

At the end of 2008, Brasil Telecom’s mobile telephony had 5.6 million users—growth of 31.5% from 2007. And the company’s broadband users totaled 1.8 million in the fourth quarter, which is up 15.2%.

The company has solid cash flow generation, decent operating margins, and a very attractive valuation. Additionally, the growth in the wireless and broadband segments is encouraging and should continue in future quarters. Even during a recession, everyday communications are necessary.

In fact, Anatel, the Brazilian telecom agency, recently approved BRP’s merger with Tele Norte Leste Participações SA (NYSE: TNE), creating Brazil’s biggest telecom operator. The company accounts for about 57% of the country’s fixed lines, 18.5% of mobile lines and 40% of broadband services.

Going forward, BRP will be less affected by the international crisis, since it generates a lot of cash and is less exposed to the international economic cycle. BRP is trading at just 0.4x  sales—well below the industry median and also below other Latin American telecom operators.

I recommend taking a position in BRP under $32. (It changed hands below $31 late Wednesday—Editor.) With the stock market still in a corrective phase, shares of BRP are down significantly from their 2008 high of $85 [and at] key multiyear support where long-term investors can accumulate shares.

When the emerging markets turn back up—and they will—BRP will be one of Brazil’s biggest winners, and ours, too.

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