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When elephants fly–dividends from emerging market stocks

posted on February 12, 2010 at 8:30 am
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When emerging stock markets hand you lemons, make lemonade.

Specifically dividend-paying lemonade.

So far 2010 hasn’t exactly been kind to emerging market stocks. The ETF (exchange traded fund) that tracks the iShares MSCI Emerging Markets Index (EEM) was down 6.4% from the close on December 31 through the close on February 8.

Individual emerging markets did even worse. The iShares MSCI Brazil Index ETF (EWZ) was down 15.8% from December 31 to February 8. The iShares FTSE/Xinhua China 25 Index ETF (FXI) was down 12%. The iShares MSCI BRIC Index ETF BRIC) of stocks from Brazil, Russia, India, and China was down 13.4%.

So how do you make lemonade from these lemons? Especially when it’s not at all clear that these markets, which have tumbled on worries about a slowdown in China’s economic growth (for more on why I think that worry is overstated see my post http://jubakpicks.com/2010/01/28/the-rout-in-global-stocks-is-a-tempest-in-the-teapot-of-chinas-command-economy/ ) and on fears that the budget crisis in Greece would spread to the rest of the European Union, are done falling.

Think dividends.

Now I grant you that dividends and emerging market stocks aren’t two concepts that immediately jump to mind together.  Most emerging market stocks don’t pay dividends for the same reason that most startup companies anywhere don’t pay dividends: They’ve got plenty of extremely profitable places to invest every bit of internally generated cash. Other emerging market companies don’t pay dividends because nobody else does in their local stock market, or because it’s not in the culture, or, well, for countless reasons that have to do with what can be the ins and outs of convoluted ownership structures.

Still some emerging market companies do.

 Largely in the electric utility and telecommunications sectors. Even in emerging markets the shares of companies like these use dividends to attract investors because they’re in very capital intensive business and are constantly on the look out to raise new capital. Dividends are one way to make sure that they have a steady demand for new shares.

But sometimes in sectors and industries you wouldn’t expect. For example, I don’t know why China Nepstar Chain Drugstore (NPD), the largest retail drug store chain in China, has paid a hefty 5.63% dividend over the last year, but it did.

In the rest of this column I’m going to give you some caveats for dividend investors that are especially important to investing for yield in emerging markets and then I’m going to name four dividend plays—three for further research and one that I’m going to add to my Dividend Income Portfolio today. For some help in figuring out an asset allocation that includes these emerging market plays see my post “How to build a global portfolio ( http://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ )

First, a few caveats.

Cash flows from dividends in emerging market stocks can be very unevenly distributed during the year. So it pays to pay close attention to the ex-dividend date. You can wind up waiting a long time between payouts or discover that you just missed one of only two payouts during the year or the biggest of the year’s uneven payouts.

Look at the pattern at Brazilian electric utility Electrobras-Centrais Electricas Brasileiras (EBR), for example. In the last two years the company has paid out two sets of dividends. In 2009 on May 5, Electrobras paid out a cash dividend of 2.66 cents a share and a special cash dividend of 61.84 cents a share. So far in 2010 on February 1 the company paid out a cash dividend of $1.1947 and a special cash dividend of $1.329. I couldn’t tell you exactly how long you’d have to wait for the next payout or what it might be.

Remember that these are emerging markets and that the fortunes of a even what in a developed economy such as the United States or Japan would be a stodgy utility or telecommunications company can turn on a dime on a change in regulation or a shift in government that favors one player over another.

That’s exactly what overtook Turkcell Iletisim (TKC). The Turkish government introduced mobile phone number portability (so that users who switch carriers get to keep the same phone number) in November and that’s set off a war. Turkcell has been able to maintain its subscriber growth rate but increased churn (as customers switch providers) and deeper discounts to attract new customers cut average revenue per user by about 20% in the fourth quarter. I don’t think that endangers the stock’s current 4.8% yield but it could well keep a lid on any price appreciation in the shares.

And finally, learn as much as you can about who owns the company and the bulk of its shares. You’d like to see majority owners and investors whose interests are aligned with your own. It’s never easy for a minority owner—and unless you’ve got a whole lot more money to invest than I do that’s what you’ll be in any of these stocks—in an company, but beware companies where owners may have family strategic objectives that see cash flow from one family business as a source of capital for another or where influential domestic institutions have the ability to siphon off profits before they get to public shareholders. In many cases the best guarantee for minority shareholders is the reputation of a big international investor that owns a hunk of the stock.

Second, onward to three stocks to watch and one to buy.

Two emerging market telecommunications companies make this list.

First, Telekomunikasi Indonesia or Telkom Indonesia (TLK). Over the last two years the dividends have been delivered in twice-yearly distribution with the next due, I estimate, this spring. The dividend yield right now is 3.5%. This is by far the dominant telecommunications company in Indonesia with the majority of the company’s fixed line market and through its 65% owned subsidiary about 45% of the wireless market. Big outside investor Singapore Telecom gives minority investors decent assurance of fair treatment. Here you’re buying a piece of Indonesia, one of the best growth and fiscal responsibility stories in Asia. The economy is forecast to grow by 5.2% in 2010 after growing by 4.3% in 2009. The projected budget deficit for 2010 is just 1.6% of GDP. On February 8 Fitch Rating upgraded Indonesia’s sovereign debt to BB+ from BB. I’m adding this stock to the Dividend Income portfolio today. I’ll post a buy with more of my logic later today.

Second, Philippine Long Distance Telephone (PHI). The stock of the largest telecommunications company in the Philippines pays a dividend of roughly 6%. As the dominant fixed-line carrier, Philippine Long Distance faces a problem faced by all fixed-line companies around the world—that business is shrinking as wireless phones take a bigger share of the market. Fortunately, Philippine Long Distance owns more than half that market too. The company operates in a relatively small domestic market so investors aren’t looking at the kind of subscriber growth they’d get from an Indonesia, for example. But data services and broadband internet connections are just starting to take off in this market and the higher profit margins on those businesses will fuel Philippine Long Distance’s growth. In the last two years the dividend has been distributed in two payments; on trend the next distribution would be in March. Two outside investors, First Pacific (FPAFY), a Hong Kong-based investment company, and Nippon Telegraph and Telephone (NTT) own slightly less than half of the company. With this column I’m adding this stock to Jim’s Watch List http://jubakpicks.com/watch-list/ .

And two Chinese growth companies that pay a hefty dividend make the list too. Neither are without risk—and not just because they trade on one of the world’s most volatile markets. Both these companies face strong competitors and are facing pressure on their profit margins. How attractive they are to you will depend on your take on how successful they’ll be in defending their turf.

China Nepstar Chain Drugstore (NPD). The largest retail drugstore chain in China has seen growth fueled by government initiatives to separate drug-prescribing in hospitals and clinics from drug-dispensing. Now it faces competition from the government’s effort to centralize distribution of the 300 most commonly prescribed drugs through the community health service. Margins in the drugstore business in China are even slighter than in the United States and so drugstore chains in China, like drug store chains here, try to bolster margins by selling private label products and adding services such as ATMs to draw traffic. The stock has a projected yield, based on the most recent dividend payment, of about 5.2%. Next distribution looks likely in April.

China Medical Technologies (CMED). This medical testing company faces competition not from China’s government but from the huge multinationals that dominate the medical testing business in much of the rest of the world. As China Medical has faced local competition on price that has cut into margins on its commodity tests, it has moved up the testing ladder into technologies such as semiautomatic enhanced immunoassay devices that let hospitals offer a wide variety of tests with limited staffs. But as the company moves up this ladder it will increasingly run into competitors such as General Electric (GE). That’s likely to slow the company’s growth but still leave operating margins near 30% for the medium term. The stock now yields roughly 4.2%. In recent years the dividend has been paid in a single installment in either July or September.

I’m going to add both these stocks to Jim’s Watch List with this column.

Full disclosure:  I own shares of China Medical Technology and Telkom Indonesia in my personal portfolio.

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  • EdMcGon on 12 February 2010

    On a side note related to the market tanking today, I’m lowering my positions (although not selling completely) in BRF and GLD. I expect the next few days to be rough on them. I may increase my positions again after the market shakes off these items of news.

  • Seaturtlelady on 12 February 2010


    I have to pay 12.99 to buy or sell a stock since I’m just “small” fry. Will have to keep my “small” position on BRF and ride the tsunami out! :-)

    Still like my AOD though…

  • EdMcGon on 12 February 2010

    I was carrying overweighted positions of both of them in my portfolio (over 10% each).

  • Run26.2 on 12 February 2010
  • EdMcGon on 12 February 2010

    It’s still a little early for that, although that is definitely a long term prospect.

  • bsdgv on 12 February 2010

    Talking about emerging stocks with dividends:
    How about ABV of Brasil with a yield of 3.5%?

  • YX on 12 February 2010

    Thanks for this posting and all updates yesterday! This is what I have been looking for, emerging market stocks with good dividends. Today’s drop may give a good opportunity to buy.

    Regarding Greece/Euro, I think none wants to bailout someone else. (Greeks are like distant cousins to the German and French, even though their geographic distance is not that far). It’ll ultimately depend on how much the key countries (Germany, France, etc.) want to maintain their international influence through EU. China’s rise has marginalized a lot of countries (pretty much all the G7). The only way that countries like Gernany and France could remain as a key international players is through a much big entity, EU (while UK works its way through the special tie with US). Therefore, my guess is at the end, there would be some kind of half-hearted aid, jut enough to keep the EU confidence intact after Greece makes some kind of fiscal promise.

  • bsdgv on 12 February 2010

    > How about ABV of Brasil with a yield of 3.5%?

    Damn Yahoo! Never mind. The yield on ABV is rather 1% based on last year’s rate.

  • EdMcGon on 12 February 2010

    Merkel has already said no to a Greek bailout from Germany:

    I posted that link earlier this morning, but my comment is still “awaiting moderation”. I guess I look like a spammer.

  • YX on 12 February 2010

    I saw that one last night, but I still draw my above mentioned conclusion. She is not going to hand out for free! She is going to make Greece pay too.

  • Run26.2 on 12 February 2010


    I agree that it is early for a euro breakup, but it would seem that they either need to move towards increased consolidation or start to unwind it. Right now, it seems they are trying to have the best of both worlds and that will not last. I thought the story was interesting based on the history of the economist quoted.

  • YX on 12 February 2010

    Merkel is a very shrewed politician. Easily giving away things does not make her looking good in frontof her domestic audience. But at the end I bet on they’ll choose to keep EU.

  • EdMcGon on 12 February 2010

    I’m not so sure. Consider what would happen if Obama said he’d bail out Greece? He’d be tarred and feathered by just about everyone in the U.S.

    Now ask: Is Germany THAT much closer to Greece than the U.S. is? Is Germany in that much better economic shape that they can afford to bail out Greece?

  • rookie125 on 12 February 2010


    2 dividend stocks in Malaysia is worth looking at – the recently relisted telephone company – Maxis Berhad and prominent contractor/plantation owner/property developer – IJM Berhad.

  • southof8 on 12 February 2010

    The common market has been a great thing for all of Europe, Germany and France in particular. This is a growing pain. All of the politicians will posture and bitch, and then make a deal to move the ball forward. Going back to 1980s style stagnation, high unemployment, regional battles and immobility ain’t a great option.

    With the good comes the bad. Europe’s had an amazing decade. Remember when the Euro was introduced at $1.17 per and promptly dropped to $.85 per, only to nearly double over the next ten years? Europeans of all nationalities have seen the benefit of combining their resources and talents and making the whole greater than the sum of its parts. They won’t turn back; there’s no good option to turn to.

    Greece is getting killed by drop in tourism and the yoke of the spending orgy from the Athens Olympics. Spain and Portugal came too far too fast. Growing pains were inevitable. But this is not the end.

  • southof8 on 12 February 2010

    And YX is right on- without the EU, France is irrelevent. National pride would never allow them to become irrelevent.

  • grindy2424 on 12 February 2010

    One other emerging market high dividend stock I like is CEL.. Pays about 9.5% and is telecom…….

    Jim is this part of your strategy for now thinking we may see slow market growth and quite a bit of choppiness over the next year while everyone takes stock on the economy???

    My thoughts is we are going to be stock in this range for 6-8 months so I have been raising a bit of cash to buy on a dip (970ish?) but also adding dividend stocks while I wait.

  • jearly on 12 February 2010

    As a novice at this, I could use some help. Can any of you explain why the Yahoo investing page lists ABV Div/yield at 3.62 & 4.0 respectively, while the MSN site lists the ABV Div/yield at 2.11 & 2.32.


  • YX on 12 February 2010

    We can never underestimate France’s desire to remain on the world stage, though their days are long gone. Given France’s increasingly declining economic and military power, France would try to work on Germany as it has “smartly” figured out how to use Germany’s economic gravitas. The whole EU thing in a way is a platform for France to PLAY the “spoke person” role for German economy. France has more steak in EU than Germany. Germany is still very competitive on its own.

    Because of Merkel’s domestic audience will NOT sit well with bailing out Greece (Germans have no love for Greeks! That’s why I used the term “distant cousins”. How many people care about their distant cousins?), Merkel will play tough first. and knock on Greece as hard as she can to get out as much concession as possible. At the end, screwing up the EU is even worse for them.

    Forget US bailouting Greece. Not going happen.

  • Run26.2 on 12 February 2010

    jearly: the difference could be forward vs trailing dividends. I like to look at the chart and see when they were paid and how much. Also, the company web sites usually have a dividend history.

    A few other things to keep in mind when getting foreign dividends. Many foreign companies will base dividends on their profit and will not have a set amount every year like a US company. This can lead to fluctuations in the amount paid. This is not bad, because when they do good you do good and they won’t kill the company to keep the dividend high.

    Second is most will have foreign tax withheld. Kiss that goodbye, but you get a credit on your taxes.

  • Jim Jubak on 12 February 2010

    Grindy, I am looking for ways to reduce the pain of being early. I think there’s enough uncertainty from China and the U.S. that the emerging markets story, as strong as it is, could see a delay in delivering the returns over the next year that I see in the long term. I don’t mind getting paid 3.5% if that happens.

  • Koen on 12 February 2010

    What do you think about CPFL ENERGIA SA (CPL)? This Brazilian electric utility company pays a dividend of over 6%, has a growth perspective and the brazilian currency looks stable.

  • jearly on 12 February 2010

    Run 26.2

    Thanks for the insight.

  • dcmarciano on 12 February 2010

    What would the end of the carry trade have on these emerging market stocks? It’s all very confusing to me but I think the dollar can gain strength in two ways: 1) Higher interest rates which would follow a recovering US economy (or the illusion thereof) 2) World-wide loss of appitite for risk making the dollar the least worst option to hold as a currency. What happened to the dire warning about how the end of the carry trade would precipitate the next time down? Was that overblown or has the event horizon been pushed back another year or so?

  • grindy2424 on 13 February 2010


    I couldn’t agree more with your analysis. I have been working on finding some good dividend stocks as a nice hedge. I think TLK is as good as it gets in regards to a company to hold over the next 5-10 years and receive compounding dividends.

    I’ve been following some of the articles you wrote late last year and I think we have a decent shot at the carry trade unwinding somewhat slowly which would be great for everyone (The 15% haircut we have had in emerging markets represent this here. I say we are more unlikely to see chop, chop, chop as these forces balance out)

    Something you briefly discussed and I think could be a great story for the second part of the recovery is Tech stocks powering through (though I agree with adding a NUE or more JCI at this time).

    Going forward I think the wild card is still china and the dollar peg as this could have some huge effects.

    Brazil still looks good, TUR is showing signs of greatness and Indonesia is excellent just needs a good entry point.

    Something that I appreciate most about all of your columns you do is you lay out your reasoning for the trends that you are investing. It has been your MO and the most important lesson I have learned in investing. In the business world a take your trends and look for ways to piece of portions of the business for my company.

    Thanks again

  • amtrend10 on 13 February 2010

    Jearly. simple as rates configured at different time(different prices) P/E ratios differ in the same manner. Safer for you to figure your own ratios and dividends at whatever price you are considering… abv today pays $2.11 annual dividend…current price is $92.35 so d/p =.0228 or 2.3% today.

  • cakinlife on 29 December 2010

    I was wondering if TLK would still be a buy today? Has the fundamental story changed?

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