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“Guaranteed” Cash Flows and High Yields

08/23/2010 12:00 pm EST


Bryan Perry

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

Bryan Perry, editor of Cash Machine, says an asset manager for Chile’s privatized social security system gets steady contributions and pays out hefty dividends to shareholders.

Imagine a privatized social security system that allowed only three approved private companies to manage the assets of the fund, with most contributors staying with the same asset manager for the balance of their working lives. If this sounds like a pretty sweat deal, it is for [shareholders of]  Administradora de Fondos de Pensiones Provida SA (NYSE: PVD)

Chile privatized its social security system in 1981, and Provida is the dominant AFP (pension administrator) in Chile and Latin America. It has $35 billion under management, serving two million customers through 80 branch offices all over the country.

Every month, Chileans have a fixed percentage of their paycheck automatically deducted and sent to an AFP of their choice. This happens rain or shine, bull or bear market, making Chile's AFPs, in essence, the only asset management firms in the world with virtually guaranteed positive fund flows.

The privatization of Chile's national retirement system has spurred the savings rate to 26%, while the country has maintained annual GDP growth of 6% amidst strong wage growth, further adding to long-term fund flows and AFP profits. Thirty percent of the assets in the entire system are under Provida’s management. And like any asset management firm, capital expenditures are nominal, enabling the company to pay out a fat dividend yield.

Provida earns its money from charging fees on new monies coming in and existing monies in retirement funds. As worker contributions grow, fees generated grow in tandem. If the assets of the funds also increase in value, Provida's fees will reflect higher payouts. Conversely, if the value of the assets declines, Provida's fee income will also be reduced.

Chile's stock market never suffered the subprime meltdown that the US went through, but the assets Provida manages are invested in global stock and bond funds. They suffered from the 2007 and 2008 meltdowns before recovering in 2009 like most markets.

The company reported a 50% year-over-year rise in profits this past quarter and paid out a semiannual dividend of $2.76 back in May. If PVD pays out the same dividend in October, it would equate to an 11.04% [yield at a recent price] of $50 per share and 14.07% after taking into account the exchange rate from the recent strength in the US dollar. (The stock closed below $54 Friday—Editor.)

Like the Brazilian stocks we've owned, the dividend policies of Latin American companies are erratic, to say the least. They don't pay often—usually once or twice a year—and are either radically high or radically low.

In Provida's case, it's the growth of the money they manage that determines the dividend payout. Latin America is one of the bright spots for investing long term and Chile's 6% growth rate is enviable, given how developed the economy there is.

This stock will be one where the dividends will be a bit like trying to capture mercury in a bottle. They will invariably be erratic, but hopefully erratically higher quarter after quarter.

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