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Buy CPFL Energia (CPL)

posted on September 20, 2011 at 3:32 pm
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The recent pull back of about 10% in the Brazilian real versus the U.S. dollar has removed some of the currency risk from owning Brazilian utility CPFL Energia (CPL) for its 6.5% yield. And the recent interest rate cut from the Banco Central do Brasil suggests that interest rates are headed modestly lower in the medium term—which is likely to push up the price of income producing utility stocks as investors in Brazil looks for more income. The combination makes CPFL Energia, which trades as a reasonably liquid ADR in New York, an attractive income-producing total return proposition, in my opinion, for a portfolio such as my Dividend Income portfolio http://jubakam.com/portfolios/ . (I included this stock in my recent post “Lemons into lemonade: High yield stocks from today’s market rout for tomorrow’s retirement portfolio” http://jubakam.com/2011/09/lemons-into-lemonade-high-yield-stocks-from-todays-market-rout-for-tomorrows-retirement-portfolio/ .)

CPFL Energia is Brazil’s largest private power distributor with about 13% of the national market. About 75% of operating income comes from regulated electricity sales, which provides a high measure of revenue predictability. (These rates aren’t set for regulatory review until late 2013.) The company’s customer base is concentrated in the traditionally fast-growing Sao Paulo and Rio Grande do Sul states, which gives CPFL Energia a good shot at growing revenue faster than the national economy. Credit Suisse projects 2011 revenue growth at 7.1%.

Many of Brazil’s electric utilities face a price squeeze as new capacity comes on line at a pace that looks like it will outstrip the growth rate of demand. CPFL Energia is well positioned to avoid that problem because it is not only the most efficient distributing company among publicly-listed utilities (with a return on invested capital for 2011 projected at 15.2% by Credit Suisse), but also has contracted just about all of its generating volume for the next 20 years. In addition the company is moving strongly and quickly into alternative energy production. For example, the company has formed a joint venture with Energias Renovaveis to develop wind, small hydro, and biomass projects.

The New-York-traded ADRs (American Depositary Receipts) selling at $24.48 today, September 20, trade near the bottom of their 52-week range of $22.84 to $30.66. The units pay a yield of 6.5%. The only downside, and this may have an influence on your timing, is that the company will pay out its first half dividend on September 30 to shareholders of record as of August 17.

Full disclosure: I don’t own shares or units of any of the companies or partnerships mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post.  The fund did not own shares of CPFL Energia as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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3 comments

  • fojack on 20 September 2011

    cheers jubak, will look at cpfl energia for possible investment, looks good

    jack
    http://jackfoley.net

  • TLA on 20 September 2011

    Jim
    What about their debt being denominated in US dollars and earnings all in reals? This is not as safe as a US utility because that debt is harder to pay if the real falls to the dollar.

  • dragonfly on 21 September 2011

    Hi Jim:
    I like CPL and think CPL is worthy of consideration but with only 2 pay dates and a long way till it’s next dividend in April 2012 it may be prudent to wait for a pullback with a market correction. Anyone agree/disagree??

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