A Tortoise That Runs Like a Hare

10/15/2007 12:00 am EST

Focus: GLOBAL

Bryan Perry

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

Bryan Perry, editor of The 25% Cash Machine, says a Brazilian utility offers the best of both worlds—rapid earnings growth and a fat dividend.

Brazil is an emerging market economy and one of the fastest-growing countries in South America. Roughly 74% of Brazil’s population of 155 million has moved from rural areas to live in its fast-growing cities. As you might expect, this migration is placing demands on education, healthcare, housing, and increased energy needs.

Hydropower accounts for nearly 80% of all electricity generated in Brazil. So, CPFL Energia (NYSE: CPL), which was born out of the privatization of Latin American utilities, is currently operating two hydropower plants. CPL has plans to add four more plants by 2010, allowing it to double its current 900 MW power-generation capability.

CPFL Energia, the largest utility holding company in Brazil, engages in the generation, distribution, and commercialization of electric energy in Brazil. As of December 31, 2006, the company distributed electricity to approximately 5.9 million customers.

With a market capitalization of $9.31 billion, it’s truly one of Latin America’s premier big-cap growth stocks, and should provide us with stellar growth and big-time dividend yields as the Brazilian economic growth theme continues to unfold.

CPL’s net operating revenues rose 18.2% for the second quarter, [while] net income for the same period increased 20.9% from the [same quarter a year ago]. EBITDA (earnings before interest, taxes, depreciation, and amortization) advanced 23.5%. CPL’s second-quarter earnings totaled $658 million, up 18.9% from a year ago, on revenues of $2.9 billion.

This kind of top- and bottom-line growth just isn’t achievable in mature economies, [and] the economies of scale are huge.

With a forward dividend payout of $5.09 per share, the current yield on this rapidly growing utility is right at 9%. It doesn’t quite get us a double-digit yield, but we won’t miss the mark by giving up 1% in dividend yield, if we collect potential 20% capital gains. I’ll make that trade-off any time.

With a stabilizing economy under the leadership of President Lula and a growing demand for electricity to support Brazil’s burgeoning growth, CPL is a high-dividend-paying value stock investors should seek to own. Utilities within emerging markets are steeped in a history of paying out luxurious dividends so as to attract foreign capital—and yes, I’m attracted.

Buy shares of CPFL Energia S.A. up to $60. The stock has made a rapid ascent off its 200-day moving average, jumping from $50 to $60 in a matter of only two weeks. My hunch is that we will get a chance to buy the stock at, or under, $55 before it resumes its march higher. I believe that when the first signs of short-term profit taking set in, we will have more than one opportunity to buy CPL under $55.

(The ADRs closed Friday near $62—Editor.)

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