“22.3% Dividend Yield in the Market that Has Outperformed Both China and India!”

By Travis Johnson, Stock Gumshoe, June 30, 2009

Today we’re looking at a high yield stock that’s being pitched by Carla Pasternak for her new High-Yield International newsletter that looks for big dividends overseas.

High Yield International has been around for a while, as far as I can tell — it used to be edited by Nick Lanyi, so perhaps he’s moved on to bigger and better things and they’re just “relaunching” with Carla as editor, I don’t know exactly what happened. Keeping track of the newsletter closings, launches, and editor changes is a nearly impossible task — that’s the joy of the newsletter world, if it doesn’t work you can change it up overnight and >bam!< a new newsletter is born that happens to have the same title and goal as the one that existed before, but with a clean slate that erases any disappointing performance. That might not be what happened here, but I've sure seen it plenty of times in the past. But that's water under the bridge, as they say ("they" being the cliche lovers and lazy writers of the world -- not me, of course) -- what is Carla touting as her high dividend pick today? Here's the first part of the pitch, which includes a few clues:

“Would you believe the map the world has used for five centuries is wrong?

“The Mercator projection shows Brazil about the same size as Alaska. That’s a distortion. Brazil is actually almost the size of the United States — and six times bigger than our largest state. And right now, I’d say your profit potential is also about six times bigger in Brazil, too.

“Brazil: Rewriting the Investment Map

“Brazil is by far the largest nation in South America, and its $1.8 trillion economy ranks 10th in the world. That’s larger than Russia’s, India’s, Australia’s or Mexico’s.

“After emerging from the global crash with barely a scratch, Brazil is on track to resume its rapid economic expansion at a +4.1% annual clip through 2012. The U.S. will be lucky to grow half that fast.

“Good things happen to investors in markets where economic growth is strong….

“Capturing Double-Digit Yields in Brazil

“I love capital gains as much as the next guy. But if you’re an income investor, growth alone isn’t enough. You want to lock in a high dividend stream, too.

“Brazil is a feast-or-famine market for dividend lovers. Only 41 companies in Brazil pay dividends higher than 7%. But of those, the average yield is 11.6%! And although these companies are household names in Brazil, few Americans even know they exist.

“But our High-Yield International readers sure do. In recent months, editor Carla Pasternak has uncovered Brazilian stocks with dividend yields of 7.5%, 8.7% and 9.4%. But those are all tiny compared to her latest find. After two weeks of research, Carla recently discovered a fast-growing Brazilian telecommunications company with a 22.3% yield.”

So there we have it — a telecommunications company in Brasil, one that apparently has paid out handsomely in the past year. What could it be?

Well, according to the musings of the mighty Thinkolator, this appears most likely to be …

Tele Norte Leste (TNE for the ADR)

Tele Norte is the biggest fixed-line telecom in Brasil and the third or fourth largest wireless carrier — as with more developed countries, the fixed lines provide the monopoly earnings power and stability (with some growth from broadband) and the wireless business provides the growth. They operate under the Oi brand name for both wireless and wireline services.

And yes, I’m using both Brasil and Brazil as I type today — Kind of like throwing around both Beijing and Peking, I am both lazy and open-minded.

Tele Norte recently bought one of their big competitors, Brasil Telecom (BTM and BRP) — Brasil Telecom also trades as an ADR in NY, and you can still actually buy the shares, though now you’re technically buying shares in a subsidiary (it also pays a nice dividend, not sure whether the shares will eventually be consolidated or not).

Now what about that dividend? This is one of those cases where it’s probably technically accurate to say that it paid out 22% in the past year, but also possibly misleading — shareholders should probably expect something lower in the future. According to the company’s investor relations website (Yahoo Finance et al are often a disaster for foreign share data), they declared three dividends in the last 12 months — one of .73 and two of 3.139 (those numbers are in Reals). That adds up to about 7 Reals, which at the current exchange rate is right around $3.60, so pretty close to the teased amount (and the US$/Real currency fluctuation can be significant, so that’s close enough). At the current price of $14.80 that would be a yield of around 24% — though I wouldn’t count on that as a future dividend yield, companies in Brazil typically pay out a percentage of net income as a minimum dividend, and some try to routinely increase the dividend, but there is not the focus on a steady and growing dividend as we see with US blue chip companies — the dividend can and does fluctuate wildly.

You can see the dividend policy of the company here — it essentially says that they will pay out a minimum of 25% of adjusted net income as dividends.

As of now, they’re paying dramatically more than net income in dividends, though I didn’t check to see what their “adjustments” are, and both of the large dividends of the past year have been classified as “extraordinary” — that doesn’t necessarily mean that they won’t pay them out in the future, but dividends for these shares are generally paid out many months after they’re declared.l I can’t even tell for sure without digging further exactly what dividends have really been paid into investors accounts, that theoretical 24% may well be an overstatement of the facts. And of course, there’s probably a tax on those dividends before they reach US investors.

It should be noted that Tele Norte’s earnings report didn’t inspire much excitement last month on the bottom line, but that was largely because they took on a lot of debt to acquire Brasil Telecom, and because they’re investing pretty heavily to build their wireless business, particularly in Sao Paolo. That wireless growth will not come cheap, they may well be the strongest locally owned telecom, but the wireless business is currently dominated by top providers that are owned by America Movil and Telefonica, two companies that clearly know what they’re doing.

And the shares have certainly enjoyed a nice bounce both from the merger/acquisition being finalized and from the general recovery of the Real and the Brazilian markets — TNE has just about doubled off the lows of last year, which isn’t that different from the performance of the Brazilian market as a whole or of the broader emerging markets indices.

In the end, though, isn’t a telecom company with a dividend in the 7-10% range (that’s just my estimate of what seems likely for this firm going forward) fairly impressive? Especially if that firm is trying to grow aggressively, and may be enjoying monopoly pricing power in their wireline/DSL footprint and a nicely growing wireless business if they’re able to profit from “bundling” as AT&T and Verizon have in the US? It is, at least, interesting — just don’t count on a 22% income yield in the coming year. Possible, but certainly not guaranteed … I’d expect something lower, and be pleasantly surprised if the payouts continue to be unusually large.

So whaddya think? Have a favorite Brazilian investment, or a favorite high yielding telecom or utility? Does Tele Norte sound appealing to you? Let us know with a comment below — thanks!

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10 Comments on "“22.3% Dividend Yield in the Market that Has Outperformed Both China and India!”"

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eric jacobson
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eric jacobson
June 30, 2009 11:47 am

Just had to say, I truly appreciate someone who’s both lazy and open-minded. That’s the best line I’ve read in a long time 🙂

martin shank
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martin shank
June 30, 2009 3:39 pm

I’ve owned TNE for less than a year and been paid $4.47/share in 4 dividends, making the yield at today’s price about 30%. Brazil is in good shape economically and I don’t see any reason for cash flow to decrease for TNE, they just raised $500M. Dividends will likely increase as this company grows. I was expecting a dividend break for a while but they just paid out $1.05/ADR. This company trades for way more in Brazil, and today may have been the short covering TNE needed to get on its way to a P/S near 1, like other telecoms.

martin shank
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martin shank
June 30, 2009 3:43 pm

sorry, raised 750M

danny
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danny
June 30, 2009 3:55 pm

I think now is an excellent time to buy TNE. Thank you Mr. Gumshoe, great writing as usual.

http://seekingalpha.com/article/145059-brazil-s-telecom-adrs-are-oversold

Myron Martin
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Myron Martin
July 1, 2009 7:20 pm

Having made good money on several telecoms over the years I appreciate your profiling this company as I have also done well with the Brazil ETF (they probably own it) so maybe I am already benefiting.

It might still make sense to buy it directly!

Joe B
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Joe B
July 2, 2009 11:17 am

I find Brazil an open opportuity for investors. I’ve owned PBR for a few years. Unfortunately, didn’t jump out at over $70. But, still very profitable.
I think TNE looks very impressive.

British
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British
July 2, 2009 1:24 pm

The SEC Regulation Every Investor Should Know About, “virtual ATM” strategy to average $219,600 a year income … without buying or owning anything
whats this one about?

Gary
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Gary
August 11, 2009 4:06 pm
While the information about the percentages is correct according to the website link given I see that no one has taken notice so far of the semantic difference between 25% of adjusted income and 25% of share price. While the over sized dividends may continue for a good while it would still behoove any one takeing a close look at this stock for long term investment to do just that. Take a good look and judge it according to its growth potential. None wish to be caught wondering why it is that they didnt do the math and learn that… Read more »
Edgar
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Edgar
August 25, 2010 3:49 pm

I have been looking at the Brazilian market since acquiring funds and need to be fully invested in the best return safest of those bonds. I would appreciate any information as to a specific Fund, or broking house which may specialize in this drjmmen@hotmail.com is my email and would like direct contacting. Thanks.

stan tussing
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stan tussing
August 12, 2009 12:03 am

really?

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