Keeping the Lights on in Brazil

03/12/2008 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy, editor of Forbes International Investment Report, finds an electric utility in one of Brazil’s most populous areas that pays big dividends and is dirt cheap.

Suppose I told you about a company that is delivering double-digit growth in earnings and revenue, has a strong balance sheet, and the demand for its product is extremely resilient even in times of economic stress.

And suppose I told you that this company sells for less than eight times earnings and offers a dividend yield of almost 9%. You might say, “What’s the catch?” Well, for folks who are wary of emerging markets by nature, I guess there is one catch. The company I’m talking about is based in Brazil.

Companhia Energetica de Minas Gerais (NYSE: CIG), better known as “Cemig,” is the sixth-largest electric utility in Brazil. It operates in Minas Gerais, which is the country’s second-most populous state, with 19 million residents.

Cemig, which is 51%-owned by the government, does business in seven other Brazilian states, as well as in Chile. It has 52 power plants and another six plants are under construction.

About half of Cemig’s operating income comes from generating electricity, and the rest comes from transmission and distribution. In the first nine months of 2007, Cemig delivered 32% net income growth, and a 43% increase in EBITDA (earnings before interest, taxes, depreciation, and amortization).

Cemig’s NYSE-listed ADRs plunged about 20% last month, after the Brazilian Electricity Regulatory Agency said it would propose a bigger-than-expected cut of almost 10% in Cemig’s tariff rates.

 But for those who take a longer view, Cemig still looks like an attractive opportunity. While economists are still debating the precise impact of a US recession on emerging markets, Brazil’s economy should be able to continue to grow at a pretty robust clip even if the US tanks.

Last year gross domestic product grew 5.1%. That will probably slow down this year, but Brazil can grow at roughly a 4% pace over the next five years. That’s more than adequate to ensure a healthy demand for electricity.

CIG can be a volatile stock. But at a recent $18.50, it traded for [a bit more than] eight times 2008 estimated earnings and has an enterprise value [that’s around five times] EBITDA. To me, those numbers seem to price in a fair bit of uncertainty.

Nor is Cemig’s balance sheet a cause for concern. Its debt-capital ratio is a manageable 45%, and less than 10% of that debt is denominated in foreign (i.e. non-Brazilian) currency.

Cemig [also] generates EBITDA margins north of 40% and 20%-plus net margins. And Cemig’s policy is to pay out 50% of earnings in the form of dividends. In addition, it typically pays out an extraordinary dividend every two years. Dividends for 2008 could run about $1.60, giving you an 8.7% yield. That doesn’t sound like a “risky” investment in my book.

A bit volatile? Yes, but don’t overlook a solid business like this just because it happens to be based in Brazil.

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